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MENTAL MODEL · M6210

Financial Instability Hypothesis

Financial Instability Hypothesis
BusinessHigh supportMacroeconomics
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Version 1.0.0 · Updated 2026-07-30

CORE DEFINITION

"Stability is destabilizing." Long-term economic prosperity entices investors to speculate through borrowing, causing the debt structure to shift from hedge to Ponzi, ultimately triggering financial crises. Crises are endogenous features of capitalism, not external shocks.

SCAFFOLDING EFFECT

psychology

Reduce cognitive load

Be wary of good times. When you feel that "the situation is excellent and will never fall," that is precisely when the system is most fragile. Maintaining a fear of debt during booms is a life jacket for navigating cycles.

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Minsky proposed that long-term stability causes agents to underestimate risk and increase leverage, shifting financing structures from hedge to speculative and even Ponzi, ultimately accumulating fragility and triggering crises—stability breeds instability.

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Source support: Explicit

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    en.wikipedia.orghttps://en.wikipedia.org/wiki/Hyman_MinskyZH · Explicit
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