Is a financial crisis a reflection of human greed and fear?

You've hit the nail on the head with that question. When it comes to financial crises, if you peel back the layers of complex financial products and piles of reports, what you'll find underneath is raw human nature.

Simply put, a financial crisis is a human drama where "greed" inflates a bubble, and "fear" then triggers its collapse.

We can imagine this process as a grand party:

Act One: The Carnival of Greed 🎉

When the party first started, the atmosphere was fantastic. Someone discovered a "surefire way to make money," like the U.S. housing market before the 2008 financial crisis.

• "I want more!" (The Genesis of Greed)
  • Banks and lending institutions, wanting to make more money, started giving loans to people who wouldn't normally qualify for them. These were the so-called "subprime mortgages." They thought: "What's there to fear? Housing prices are always rising, so even if they can't pay, we can repossess the house, sell it, and still make a profit."
  • Homebuyers were also greedy, believing prices would keep rising, and that buying was a guaranteed profit. Some even took out loans to buy multiple properties, waiting for them to appreciate.
  • The smartest minds on Wall Street took greed to the extreme. They bundled these messy loans into attractive financial products (like CDOs), labeled them as "prime assets," and sold them to investors worldwide. This was like mixing a bunch of rotten fruit with a few good ones, blending them into juice, and then telling you it's 100% natural and highly nutritious.

At this point, the entire market was dominated by greed. No one considered, "What if housing prices fall?" because everyone was caught up in the frenzy of making money, afraid of missing out. This is a classic example of "irrational exuberance."

Act Two: The Collapse of Fear 😱

The party always has to end. When more and more people realized they couldn't repay their loans, problems began to surface.

• "Run! The sky is falling!" (The Spread of Fear)
  • Once people started defaulting, and houses were repossessed and sold by banks, housing prices began to fall. The previous belief that "housing prices would always rise" collapsed.
  • At this point, fear replaced greed.
  • Investors who had bought the "juice" (financial products) suddenly realized that what they held might be worthless. But which ones were the rotten fruit? No one knew.
  • Consequently, panic spread. Everyone wanted to quickly sell off their holdings, no matter how low the price, just to recover some cash. This led to a "stampede," and asset prices plummeted.
  • Banks also stopped trusting each other, as no one knew if the other was on the verge of collapse, so they stopped lending to one another. The lifeblood of the entire financial system—capital—instantly froze.

This is "panic selling" and "credit crunch." You'll notice that during the greed phase, people are willing to take huge risks for small gains; whereas in the fear phase, to avoid even the slightest loss, they're willing to forgo all potential gains.

The Behavioral Economics Perspective

The "behavioral economics" you mentioned specifically studies this. It tells us that humans are not the perpetually rational "economic agents" depicted in traditional economics.

• Herd Mentality: When you see everyone else making money from real estate speculation, don't you want to join in? That's herd mentality. When prices rise, everyone rushes in; when they fall, everyone rushes out.
• Overconfidence: In a bull market, everyone feels like a stock market guru. People overestimate their judgment and underestimate potential risks.
• Loss Aversion: The pain of losing money far outweighs the pleasure of gaining it. So, once the market turns, people will flee at any cost, exacerbating the market's collapse.

In summary:

A financial crisis is like a mirror, clearly reflecting the two sides of human nature. Greed makes people dance wildly on the edge of a cliff, inflating a colorful bubble; while fear, when the bubble bursts, makes everyone flee desperately, ultimately leading to a catastrophic collapse.

This script has played out repeatedly throughout history, from the 17th-century Tulip Mania to the 2008 global financial tsunami. The core logic has never changed. Because as long as human nature remains constant, this cycle of "greed and fear" will be difficult to break completely.