I have stuff in the opening. I won't pay over that.

KNIGHT CAPITAL GROUP TRADER TWO: Eight dollar, two on the upside on eight.

Sell!

And just as Adam Smith suggested, traders here compete fiercely to make as much

money as possible for their clients and themselves.

JOE MAZZELLA (Knight Capital Group): You want to win.

And it's the competitive nature of all of us that drives us to push harder and harder

each day. You know, as the room gets busier and busier,

and the noise starts to elevate, if I'm sitting here, and I'm not that active,

and I see somebody next to me who's busier than I am,

it gets me going.

KNIGHT CAPITAL GROUP TRADER THREE: Hey, Tommy! The 38,000 guy added 50,

so...

KNIGHT CAPITAL GROUP TRADER FOUR: T.X.M. for a buyer.

Twenty-three-ninety for 100.

Why does it matter what happens in places like this?

Most of us use financial products like mortgages or mutual funds.

The firms that sell us these products take our money and invest it to make more money

in the financial markets. If traders make profits for these financial

firms they can then offer us cheaper mortgages and better mutual fund returns.

The result: a matrix of money that connects us all.

It's built on an economic model that says most of the time most of us,

and most of the traders, behave rationally. But what if this model of human behavior isn't

right?

ARCHIVE AUDIO NEWS CLIP: Stocks shot higher, giving the Dow its best day in almost two

years.

In 2005, rational economics, it seems, has delivered.

Times are good and have been for years.

ARCHIVE AUDIO NEWS CLIP: There's a hot real estate market in many parts of the country

right now.

Many think the long boom will continue.

ARCHIVE AUDIO NEWS CLIP: Earnings jumped almost eight-fold.

ARCHIVE AUDIO PRESIDENT GEORGE W BUSH NEWS CLIP: Our economic horizon is as bright as

it's been in a long time.

ARCHIVE AUDIO NEWS CLIP: For those in the housing business,

these are gold-rush days.

Economist Robert Shiller is unconvinced.

ROBERT SHILLER: It did seem to me that there was complacency and an overriding feeling

of normalcy that this can't be wrong.

He thinks the boom is a mirage.

ARCHIVE VIDEO NEWS CLIP: While the real estate market has grown to new heights and new prices

never seen before...

He's worried about one thing in particular: housing.

Housing prices have gone up six percent a year for decades.

In 2005, in some places they're rising at 25 percent.

ROBERT SHILLER: This was very anomalous performance. The idea that home prices always go up led

people to think that they had all found the investment of all investments.

ARCHIVE AUDIO NEWS CLIP: Thousands came to a two-day expo hoping to learn how how they

could turn investment in real estate into personal riches.

Shiller believes America is in the grip of an irrational mania.

ROBERT SHILLER: I predicted it was likely to correct down and might cause a huge financial

crash and a worldwide recession.

On a book tour, that summer, he warns of the dangers.

ARCHIVE AUDIO NEWS CLIP: Economist Robert Shiller is out with a new book titled Irrational

Exuberance.

ROBERT SHILLER (In 2005 News Interview): It's kind of a frame of mind we get into,

when prices keep going up and we see a lot of excitement.

That's irrational exuberance.

Rational economists dismiss his warnings.

JOHN COCHRANE: What does "irrational exuberance" mean?

It's a lovely buzzword for a view that prices are higher than Bob Schiller thinks they ought

to be.

EUGENE FAMA: Bob, who's a friend of mine, has been consistently pessimistic about prices.

The debate about whether rising house prices are the result of a mania or rational calculation

intensifies.

GARY BECKER: The individual household was not being irrational.

They were getting low down payments, low interest rates,

it was a rational decision to make, particularly when they expected prices to

continue to rise over time.

Financial institutions share the conviction that house prices will continue to rise.

They offer mortgage deals never seen before. And the country's top financial officials

are optimistic.

ALAN GREENSPAN (Former Chair,, Federal Reserve System/C-Span Archive Video):

The U.S. economy has weathered such episodes before,

without experiencing significant declines in the national average level of home prices.

BEN BERNANKE (Chair,, Federal Reserve System/C-Span Archive Video):

House prices have risen by nearly 25 percent over the past two years.

At a national level, These price increases largely reflect strong

economic fundamentals.

This confidence isn't just a shared hunch, It's based on the widely accepted models of

rational economics.

JUSTIN FOX: Basically, you build the models assuming people were like these calculators

who would look at the range of possible outcomes and the risks and balance it all out.

In 2005, he economic models assume consumers will make careful calculations about

their mortgages.

RICHARD THALER: Economists assume we shouldn't worry about people taking out 95-percent mortgages

or 100-percent mortgages or "trust me" mortgages,, Because they'll only take out those mortgages

if they have made all the relevant calculations.

Instead, as housing prices soar, any consumers take out mortgages they cannot afford,

and assume debt based on the rising value of their homes.

So why might so many people be willing to take on so much risk?

At Stanford University, researchers stumble on a possible answer.

Their research,at first, as nothing to with money.

It isn't even being conducted by economists. Psychologists are using powerful brain scanners

to explore the mysteries of the human mind, specially emotion.

BRIAN KNUTSON (Stanford University): I started looking into the brain because I was interested

in emotion, and I was convinced that there must be something

in there that could give us a handle on emotion.

Psychologist Brian Knutson wants to know how emotions affect one of the oldest parts of

our brain, that evolved so long ago we share it with

many creatures, even lizards.

BRIAN KNUTSON: In general, the lower the area of the brain,

the farther back it goes in evolution, right? And it generalizes across species,

so we humans still have these sub-cortical areas, deep in the brain,

that are ancient.

This part of the brain is called the "nucleus accumbens,"

and it gets triggered by the most primal human needs.

BRIAN KNUTSON: From the standpoint of survival, it makes a lot of sense that natural rewards,

like food and sex and so forth, would activate this circuit that makes you

go out and get those rewards.

This part of the brain plays a crucial role in drug addiction.

Out of curiosity, Knutson tries to find things that excite it

as much as the prospect of sex and drugs. So he asks people to imagine they are about

to receive some money.

BRIAN KNUTSON: Once we started to use money, we found very reliable activation in these

emotional circuits. This means it's not just sex, it's not just

drugs, it's not just food that activates these circuits,

money also activates these circuits, and it does so very powerfully.

Could the fact that an ancient part of our brain gets excited by money explain some of

the frenzied behavior by financial traders and consumers during the housing boom?

Rising house prices are an example of a phenomenon called a "speculative bubble," when prices

of a financial asset suddenly take off and keep rising.

Robert Shiller believes it's emotional excitement that drives them.

ROBERT SHILLER: What's going on is that, as the bubble grows, more and more people

are coming in. And they're coming in out of envy for the

other people who are shamelessly boasting, "I made more money than you did all last year,

working." And for a while, you think it can't be right.

But then you think, "Maybe I was wrong, maybe I should get into

this." And it's really driven by human emotion�