Crisis and behavior

 Today during the "Market Efficiency" debate, I cannot help thinking about an article I read about human behavior.
One of the assumption of the efficient market hypothesis is the "rationality" hypothesis.
But are people rational? There might be some of them. But rational people can sometimes use the bubble to profit from unsophisticated irrational investors.

Now comes to fair-value, there are all the "safeguards" and room for discretion in fair-value accounting, why people keep accusing fair value as to blame for the death spiral and contagion?

One reason maybe that people are not rational enough. They thought that the housing price would never go down. At the beginning, they did not fully understand fair-value standards, and they did not care, for they were making money.
Then the price went down, some of them were too scared of punishment from using discretion, they just set the price so low even if they were using tier2&3 inputs.

I quoted two paragraph from"The Behavioral Revolution By DAVID BROOKS"

Source:http://www.nytimes.com/2008/10/28/opinion/28brooks.html?pagewanted=printO

"Taleb believes that our brains evolved to suit a world much simpler than the one we now face. His writing is idiosyncratic, but he does touch on many of the perceptual biases that distort our thinking: our tendency to see data that confirm our prejudices more vividly than data that contradict them; our tendency to overvalue recent events when anticipating future possibilities; our tendency to spin concurring facts into a single causal narrative; our tendency to applaud our own supposed skill in circumstances when we’ve actually benefited from dumb luck.

And looking at the financial crisis, it is easy to see dozens of errors of perception. Traders misperceived the possibility of rare events. They got caught in social contagions and reinforced each other’s risk assessments. They failed to perceive how tightly linked global networks can transform small events into big disasters. "