A Ride We Can't Stop Taking: Why Do We Keep Repeating History?

“Those who cannot remember the past are condemned to repeat it.” Philosopher George Santayana famously said. This sentiment rings especially true in the world of financial markets, where we witness bubbles and crashes time and again. But why does this happen?

At the core of this cycle is human psychology. Behavioural economists like Daniel Kahneman outline how as creatures of habit we make decisions fueled by emotions, cognitive biases, and social influence. We are driven by optimism bias and greed to take on excessive risk in times of an economic boom. The Global Financial Crisis (GFC) of 2008–2009 demonstrates the power of herd mentality - (a concept explored in Robert Shiller's work on speculative bubbles), and how it’s hard not to join in when prices are rising and everyone else is profiting. In Irrational Exuberance, he successfully called the dot-com bubble and issued similar warnings about the bloated housing market less than 10 years later. Syuan Ruei Chang provides an excellent article,  How did herd behaviour contribute to the global financial crisis, which does a deep dive into herd mentality for The Global Financial Crisis (GFC) of 2008–2009.

On the flip side, trepidation sets in when markets turn south, causing investors to sell off assets at a loss, This emotional cycle of greed and fear has driven markets since the Great Depression and continues today with overconfidence and risky mortgage practices in the 2008 crash being a textbook example. Despite historical lessons, the "this time is different" fallacy leads us to believe we can outsmart the system but until these biases are recognised and addressed, history will continue to repeat itself.