What can we learn from the financial crisis of 2008?

Quantitative Finance Level 3

A: After the financial crisis of 2008, people responded by believing that such incidents are more frequent. This belief is irrational. After all, just because a rare event happens, doesn't increase the chance of it happening again.

B: To the contrary, the belief is rational because people had a wrong belief of the probability, and would have updated it after the incident.

B’s attempt to counter A’s claim is best described by which of the following?

It makes apparent A’s failure to consider how people vary in their responses to a serious accident. It challenges A’s assumption that the occurrence of a single event is sufficient to change a belief. It shifts the basis for judging rationality to considerations of utility. It questions the aptness of the analogy drawn by A. It offers an alternative explanation of why people form incorrect beliefs.

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