The Psychology of the 2008 Crisis
How Cognitive Biases Inflated a Bubble and Triggered a Collapse
The Pulse of the Crisis
The 2008 crisis was not just a failure of financial models, but a failure of human psychology. Greed, fear, and collective irrationality, known as “animal spirits,” took control.
points in a single day (Sept. 2008), erasing market confidence.
in public funds to prevent a systemic collapse due to toxic assets.
1. The Narrative: “Prices Never Go Down”
The collective belief that housing prices could only rise fueled one of history’s largest bubbles. Federal Reserve data shows a doubling of prices in 8 years, followed by a collapse exceeding 20%.
U.S. House Price Index (1998-2011)
2. The Fuel: Debt and Toxic Assets
This optimism translated into massive debt. U.S. mortgage debt jumped from 61% to 97% of GDP.
1998
2006
3. The Engine: The Subprime Explosion
Banks multiplied the offering of risky loans (subprime), packaging them into complex securities. Their volume grew exponentially.
Volume of subprime mortgage-backed securities (in billions of USD).
4. Cognitive Biases in Action
Three main biases distorted reality, leading investors and institutions to make catastrophic decisions.
Overconfidence
“We control the risk. A simultaneous crash is impossible.” (e.g., Lehman Brothers)
Herd Behavior
“Everyone is doing it, it must be safe.” (Massively ignored risk signals)
Loss Aversion
“I won’t sell. It will recover.” (Denial that deepened the losses)
5. The Mirage: The False Security of AAA
Herd behavior was validated by rating agencies. In 2006, 93% of these toxic assets received the highest rating (AAA). Two years later, 90% of those same titles were downgraded to “junk bond.”
Ratings in 2006
93% rated ‘AAA’
Ratings in 2008
90% downgraded to ‘Junk’
Lessons for the Future
The 2008 crisis taught us that the greatest risk is not always in the numbers, but in the mind. Economic models must incorporate psychology, and we must recognize our own biases to make wiser decisions.