Financial crises are rarely caused by risks everyone is watching, like inflation (known knowns). The true danger comes from unforeseen events (unknown unknowns) like 9/11 or the Lehman collapse, which aren't priced into risk models and cause systemic panic.

Phenomena like bank runs or speculative bubbles are often rational responses to perceived common knowledge. People act not on an asset's fundamental value, but on their prediction of how others will act, who are in turn predicting others' actions. This creates self-fulfilling prophecies.

Investors consistently overestimate their risk tolerance on questionnaires because they know the "correct" answer. However, during an actual crisis, fear feels entirely rational and justified, leading them to panic and sell despite their stated intentions.

The primary driver of market fluctuations is the dramatic shift in attitudes toward risk. In good times, investors become risk-tolerant and chase gains ('Risk is my friend'). In bad times, risk aversion dominates ('Get me out at any price'). This emotional pendulum causes security prices to fluctuate far more than their underlying intrinsic values.

During a sharp market shock, assets that are normally used for diversification (stocks, bonds, gold) can all move in the same negative direction. This failure of traditional hedging forces poorly positioned investors to sell assets indiscriminately to reduce overall exposure, which in turn amplifies the downturn.

Contrary to popular belief, the 1929 crash wasn't an instantaneous event. It took a full year for public confidence to erode and for the new reality to set in. This illustrates that markets can absorb financial shocks, but they cannot withstand a sustained, spiraling loss of confidence.

Contrary to intuition, widespread fear and discussion of a market bubble often precede a final, insane surge upward. The real crash tends to happen later, when the consensus shifts to believing in a 'new economic model.' This highlights a key psychological dynamic of market cycles where peak anxiety doesn't signal an immediate top.

The true catalyst for a global crisis isn't the size of the initial failing economy, like Greece. It's the resulting panic and lack of transparency in interconnected financial instruments like derivatives, which makes every major bank an 'unwitting cosigner' to the initial default.

Selling in a downturn is driven by two distinct forces: voluntary panic from seeing portfolios in the red and consuming negative media, or forced sales (margin calls, foreclosures) when investors have used too much debt and can't cover their positions.