stability and confidence
A period of stability boosts self-confidence which in turn marks the beginning of the period of instability. The phenomenon is universal. In most cases, the confidence stems from the belief that one is in absolute control of what is being managed.
Here are three very different examples:
Giving up smoking:
"In one study, Nordgren looked at a group of people trying to quit smoking and found that it was those who rated their willpower particularly highly who were most likely to end up smoking again within a few months. The reason, Nordgren argues, is that they were more cavalier about exposing themselves to situations where they might be tempted to smoke."
"When times are good, investors take on risk; the longer times stay good, the more risk they take on, until they've taken on too much. Eventually, they reach a point where the cash generated by their assets no longer is sufficient to pay off the mountains of debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. "This is likely to lead to a collapse of asset values," Mr. Minsky wrote. When investors are forced to sell even their less-speculative positions to make good on their loans, markets spiral lower and create a severe demand for cash. At that point, the Minsky moment has arrived. The housing market is a case in point, says Investment Technology Group Inc. economist Robert Barbera, who first met Mr. Minsky in the late 1980s. When home buyers were expected to have a down payment of 10% or 20% to qualify for a mortgage, and to provide income documentation that showed they'd be able to make payments, there was minimal risk. But as home prices rose, and speculators entered the market, lenders relaxed their guard and began offering loans with no money down and little or no documentation. Once home prices stalled and, in many of the more-speculative markets, fell, there was a big problem."
In Laurence Gonzales’s riveting book Deep Survival, he gives a sobering account of four mountain climbers who successfully scaled the 11,249-foot peak of Mount Hood in Oregon — considered a “beginner’s” mountain — only to fall disastrously during their descent... The climber in the top position — a veteran of much more challenging climbs — felt that belaying (the laborious process of anchoring a climber’s rope to the mountainside to arrest a fall) was an unnecessary precaution in this case, so when he lost his footing and fell, he yanked his three tethered colleagues, and five climbers below them, off the side of the snow-covered mountain. Three men died in this unfortunate incident, and the question posed by Gonzales is what leads some individuals to such tragic ends, while others faced with the same circumstances survive? The answer, which forms the major thesis of Deep Survival, may also be the ultimate explanation for the current financial crisis: "The climbers on Mount Hood were set up for disaster not by their inexperience, but by their experience. It was the quality of their thinking, the idea that they knew, coupled with hidden characteristics of the system they had so often used. The system … was capable of displaying one type of behavior for a long time and then suddenly changing its behavior completely."
