Quote of the day by Irving Fisher: "A chief cause of crises, panics, runs on banks, etc., is that risks are not independently reckoned, but are a mere matter of imitation. A crisis is a time of general and forced liquidation"

Economist Irving Fisher’s observation offers a striking explanation of how financial crises can develop and intensify. His warning centres on the tendency of investors, lenders and financial institutions to imitate one another rather than independently assessing risk.

How Optimism Can Turn Into a Crisis
When markets are rising, such behaviour can reinforce optimism. Investors may follow prevailing trends, assuming that others have already assessed the risks. Credit can expand, asset prices can climb and confidence can become self-reinforcing.


The same dynamic can work in reverse when sentiment changes. As concerns emerge, investors may rush to reduce exposure at the same time. What begins as a reassessment of risk can turn into widespread selling, falling asset prices and tighter access to credit.

Read more: Quote of the day by Howard Marks: "Memory – and the resulting prudence – always comes out the loser when pitted against greed"

The Meaning of Forced Liquidation
Fisher’s reference to “forced liquidation” captures a crucial feature of financial crises: participants may be compelled to sell assets not because they believe those assets have suddenly lost all value, but because they need cash, face margin calls or are attempting to reduce leverage.

How Selling Can Feed on Itself
This can create a feedback loop. Falling asset prices can increase financial stress, prompting further selling and adding to downward pressure across markets.

As more investors attempt to reduce their exposure simultaneously, liquidity can deteriorate and price declines can become sharper. What initially appears to be a change in market sentiment can therefore develop into a broader financial shock.

Why Fisher’s Warning Still MattersMore than a century after Fisher developed his ideas on debt and financial instability, his observation remains relevant to the way modern markets respond to shifts in risk perception. It highlights the importance of independently assessing leverage, liquidity and exposure rather than simply following the crowd.

Lesson for Investors
Fisher’s words ultimately point to a central feature of financial crises: risk can become most dangerous when it is treated as something to be copied rather than independently understood.


(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)