Below is a chart which looks at the dangers of over optimism in markets – Keynes referred to this as ‘Animal Spirits’. Nobel economist Daniel Kahneman describes overconfidence as the engine of capitalism but there are concerns whether the success of entrepreneurs in markets is due to their skill or the fact that a lot of luck is involved. One thing is for sure – when they are successful they tend to become overconfident about their ability to survive a crisis. This in turn inflates asset prices which makes asset buyers more optimistic about borrowing more money and banks more confident of repayment. However, as we have seen it all comes to a head and the bubble bursts.