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How Human Emotion Creates Booms, Busts, and Every Market Extreme**

Purpose

Explain why markets swing too far in both directions — not because of data, but because human beings consistently overreact to fear and greed. Psychological cycles are the most predictable—and the most repeated—force in economics.

Core Principle

Psychological Cycles = The Emotional Amplifier of Economic Cycles**

The economy moves because of fundamentals.
Markets move because of people.

Human behavior exaggerates:

• expansions

• recessions

• market rallies

• market crashes

This emotional amplification is why markets overshoot on both sides.

The Four Drivers of Psychological Cycles

Psychological cycles follow a predictable emotional sequence:

1. Euphoria — The Boom Feels Safe

In the late stages of expansions:

• investors become overconfident

• “this time is different” thinking emerges

• risk-taking increases

• leverage rises

• asset prices disconnect from fundamentals

People believe the good times will continue indefinitely.

Euphoria always looks rational in the moment.

2. Greed — The Fear of Missing Out (FOMO)

Greed takes over when:

• prices rise quickly

• early investors become rich

• speculation becomes normalized

• crowds join late

• leverage accelerates gains

People buy because others are buying.

This is how bubbles form.

3. Fear — The Return of Risk

As fundamentals weaken:

• bad news matters again

• investors seek safety

• credit tightens

• selling begins

• confidence fractures

Fear is rarely gradual.
It emerges suddenly when expectations break.

4. Despair — The Emotional Bottom

In deep downturns:

• pessimism becomes consensus

• people expect declines to continue

• credit dries up

• investors capitulate

• selling becomes indiscriminate

Despair is the mirror image of euphoria:
It appears rational in the moment but is usually the point of maximum opportunity.

The Psychological Cycle Sequence

All market psychology follows the same arc:

1. Optimism → things start improving

2. Excitement → results confirm optimism

3. Euphoria → belief in endless gains

4. Fear → cracks appear

5. Panic → selling accelerates

6. Despair → emotional bottom

7. Hope → stabilization

8. Recovery → fundamentals rebuild

This cycle has repeated through every era of market history.

The Psychological Equation

Psychological extremes can be summarized as:

Market Behavior = Fundamentals × Investor Emotion

When emotion > fundamentals → bubbles.
When emotion < fundamentals → bargains.

What This Explains

Understanding psychological cycles clarifies:

• why markets crash faster than they rise

• why bubbles occur even in sophisticated markets

• why valuation overshoots on both ends

• why investors buy high and sell low

• why the best opportunities appear when fear is highest

• why major turning points always feel uncomfortable

Markets are not efficient — they are human.

Why This Completes the Cycles Section

You now have the full picture:

• Short-Term Cycles → expansions and recessions

• Long-Term Debt Cycles → multi-decade constraints

• Innovation Cycles → long waves of productivity

• Psychological Cycles → the emotions that exaggerate everything

Together, these cycles explain how the economy moves, why markets fluctuate, and why long-term perspective is the antidote to panic.