It seems that people think Boom-Bust cycles can be avoided. Or should be. Or that they are a bad thing. Or that they will be different this or next time.
Here are some factors many people don’t think about regarding Boom-Bust cycles:
1. Each ‘cycle’ has different people at the helm of control than the previous cycle
who didn’t experience it first hand last time. They couldn’t learn from the ‘mistakes’ because they weren’t at the coal face back then. Their cognitive and confirmation bias prevents them from heeding the advice from those who were there. Their greed and bias makes them think it will be different and they can do better.
2. Each cycle shows unique characteristics
Even if lessons from the last cycle were learned, the current cycle will always be different. It will be driven by different people, industries, assets classes, wars, meteorological conditions, phenomenons and other unpredictable events.
3. Balance is a moving target and a myth
Like a pendulum that swings from one extreme to the other, through the entire range of the radius, only ever at a fixed point for a transient moment in time, so a ‘cycle’ performs.
To think that balance and equilibrium can exist for a prolonged period of time is as delusional as thinking a pendulum will remain at the centre more frequently than anywhere else in the radius. Cycles swing through all the extremes in constant flow and velocity. Don’t expect balance, expect continual movement.
4. Everyone else is doing stupid things
The masses follow the masses. The masses are uneducated and delusional, so expect the market to move with the masses, not your ideas or ideals.
5. Human nature is to grow
It could be suggested that the purpose of life is growth. You want to get better next year, not worse. Companies, governments and financial institutions main targets and measurements of success are growth. So it’s against human and corporate nature to accept, predict or plan for any forthcoming ‘busts’ and always strive for ‘booms’ [growth], which in turn perpetuates busts [corrections].
6. Bias
No matter what happens in a market, human beings will see the world they way they see it, not the way it is. They will believe what they choose, not what is. They will act on self interest mostly in the short term that will create balance shifts in the future, like the swinging of the pendulum past the centre to the extremes.
7. Greed and fear
People tend to think things are worse than they are when they are bad, and better than they are when they are good. Fear and greed drive the markets by pushing them further towards the extremes. Markets are driven more by people’s emotions than financial metrics.
8. Momentum
It’s hard to turn the Titanic. Once the pendulum has momentum towards one extreme of the radius, the inertia is strong. Slowing, stopping and reversing it is almost impossible until it has reached an extreme.
People are carried by the momentum. People feel they have no other option but to go in the direction rather than plan for the reverse [which they are bias and delusional from seeing]
Do you have any other thoughts on this?
