The Euphoria Trap: When Greed Drowns Out Caution
Jun 23, 2025
Only after the party ends do we see the mess. The empty bottles, the broken furniture, the regrettable decisions made under the influence of collective intoxication. Bull markets work the same way—everyone’s a genius when stocks zoom, risk feels like a relic from darker times, and the idea that things could go wrong seems not just unlikely but almost offensive to mention.
This isn’t just optimism. It’s psychological rewiring. In prolonged bull runs, our brains literally adapt to expect continued gains. The fear circuits that normally fire when we contemplate loss get muted by months or years of positive reinforcement. We start treating 20% annual returns as normal, viewing corrections as buying opportunities rather than warning shots, and dismissing anyone who suggests caution as a relic from the old economy.
The normalization of risk isn’t a character flaw—it’s human wiring. But understanding why investors ignore risk during bull markets can be the difference between riding the wave and drowning in it.
The Recency Effect: Yesterday’s Wins Become Tomorrow’s Expectations
Human memory is a terrible historian. We weight recent events far more heavily than distant ones, which means a string of profitable months can erase decades of market wisdom. This recency bias explains why investors pile into tech stocks after a 50% run-up, why crypto mania peaks just before crashes, and why “this time is different” becomes the unofficial motto of every bubble.
Consider the dot-com boom. By 1999, investors had witnessed nearly a decade of explosive tech growth. Companies with no profits commanded billion-dollar valuations because recent experience suggested that profits were optional—growth was everything. The crash of 2000-2002 felt shocking, but it shouldn’t have. History was littered with similar episodes, from the tulip mania to the South Sea Bubble.
The pattern repeats because each generation of investors experiences their first major bull market as if it’s unprecedented. They haven’t lived through the full cycle, so they extrapolate from incomplete data. Recent wins feel permanent while distant crashes feel irrelevant.
Herd Mentality: Safety in Numbers, Danger in Crowds
Bull markets create their own gravity. As prices rise, more investors join the party, which pushes prices higher, which attracts even more investors. This feedback loop generates massive momentum that can persist for years, making risk-taking feel not just profitable but prudent.
Social proof amplifies this effect. When your neighbor is bragging about his Tesla gains, when financial media celebrates the latest market milestone, when colleagues discuss their crypto winnings over lunch, staying cautious feels like missing out on a generational opportunity. The fear of missing out (FOMO) overwhelms the fear of loss.
Professional investors aren’t immune. Fund managers who underperform during bull runs face redemptions and career risk. This creates perverse incentives—taking on more risk during the most dangerous times becomes a survival mechanism. As Chuck Prince, former Citigroup CEO, famously said before the 2008 crisis: “As long as the music is playing, you’ve got to get up and dance.”
Confirmation Bias: Hearing Only What We Want to Hear
During bull markets, investors become expert cherry-pickers. They consume media that confirms their optimistic outlook while dismissing contrary evidence as outdated thinking or sour grapes. This confirmation bias creates information bubbles where risk warnings get filtered out and bullish narratives get amplified.
The AI boom of 2023-2024 offers a perfect example. As artificial intelligence stocks soared, investors focused on revolutionary potential while ignoring mundane concerns like valuations, competitive dynamics, or regulatory risks. Every positive development—a new partnership, a product announcement, an earnings beat—got interpreted as validation of the broader narrative. Negative news got dismissed as temporary setbacks or buying opportunities.
This selective attention isn’t conscious deception—it’s psychological self-preservation. Once we’ve committed capital and ego to a particular view, contradictory evidence creates cognitive dissonance. The brain resolves this discomfort by minimizing threats and maximizing supporting evidence.
The Illusion of Control: When Luck Feels Like Skill
Bull markets breed overconfidence. A series of profitable trades convinces investors that they’ve mastered the game, that their success reflects skill rather than favorable conditions. This illusion of control leads to larger bets, higher leverage, and reduced hedging—exactly the opposite of what prudent risk management requires.
Day traders during the pandemic perfectly illustrated this dynamic. Stuck at home with stimulus checks and commission-free trading apps, millions of new investors piled into meme stocks and options. For months, almost any strategy worked. GameStop, AMC, and other “stonks” delivered lottery-ticket returns to amateur traders who convinced themselves they’d discovered something professionals missed.
The crash that followed reminded everyone that bull markets don’t discriminate—they lift almost everything. When the tide goes out, as Warren Buffett noted, you discover who’s swimming naked. The skill many attributed to themselves was really just beta in disguise.
Anchoring to Peak Prices: When High Becomes the New Normal
Once stocks reach new highs, those peaks become psychological anchors. A \$100 stock that falls to \$80 feels cheap, even if \$80 is still expensive relative to fundamentals. This anchoring bias makes investors vulnerable to catching falling knives, convinced they’re buying at a discount when they’re really just buying less-expensive overpriced assets.
The housing bubble demonstrated anchoring at its most destructive. As home prices soared, buyers anchored to recent sales in their neighborhood. A house that sold for \$500,000 in 2005 felt reasonable at \$400,000 in early 2007, even though both prices were unsustainable relative to income and rental yields. The anchoring made irrational prices feel rational.
Professional analysts aren’t immune. Price targets tend to cluster around recent highs rather than fundamental values. When a stock trades at \$200, analysts issue \$250 targets. When it hits \$300, they raise targets to \$350. The anchor keeps moving higher, making extended valuations seem justified.
The Availability Heuristic: Recent Success Blinds Us to Historical Risk
We judge probability by how easily we can recall similar events. During bull markets, success stories dominate our mental database while failure stories fade into irrelevance. This availability heuristic makes continued gains feel probable and major losses feel impossible.
Young investors who entered markets after 2009 experienced mostly up-and-to-the-right price action for over a decade. The 2008 financial crisis felt like ancient history, something that happened to previous generations under different conditions. This explains why leverage, margin trading, and speculative investments became mainstream again—the painful lessons of previous crashes weren’t available in recent memory.
Media amplifies this bias by focusing on winners while ignoring losers. Success stories get profiled, failed investments get forgotten. The resulting narrative makes risk-taking appear more rewarding and less dangerous than historical data suggests.
Breaking the Cycle: Contrarian Strategies for Bull Market Discipline
Recognizing why investors ignore risk during bull markets is the first step toward avoiding the trap. The second step requires deliberate counterweights to natural psychological tendencies.
Start by studying failures, not just successes. Read about investors who went broke during previous bubbles. Understand how smart people made terrible decisions under the influence of market euphoria. Make bear market history as vivid and available as bull market gains.
Implement systematic rebalancing that forces you to take profits and reduce risk as prices rise. Set specific triggers—when your portfolio allocation drifts beyond predetermined bands, when valuations reach historical extremes, when margin debt peaks. Mechanical rules remove emotion from decisions that feel impossible during euphoric periods.
Seek out contrarian voices and bear cases, especially when they make you uncomfortable. If reading negative analysis triggers anger or dismissal, that’s probably a sign you need to hear it. Bull markets punish scepticism in the short run but reward it eventually.
Most importantly, remember that bull markets end, not because of specific catalysts or predictable triggers, but because they always have. The cycle of boom and bust isn’t a bug in the market system—it’s a feature. Understanding this doesn’t require predicting timing, just preparing for inevitability.
The Paradox of Success: Why Winning Makes Us Vulnerable
Here’s the cruel irony: bull markets make us wealthy and careless simultaneously. The same psychological forces that help us ride trends upward make us vulnerable when trends reverse. Success breeds the very overconfidence that destroys it.
The investors who survive multiple cycles aren’t the ones who ride every bull market to its peak—they’re the ones who remember that peaks exist. They take profits not because they can predict tops, but because they know tops arrive eventually. They maintain hedges not because they’re pessimistic, but because they’re realistic about human nature and market history.
Bull markets test discipline more than bear markets do. It’s easy to be cautious when everything is falling apart. It’s much harder to maintain perspective when your neighbour is getting rich, and risk feels like a relic from a more primitive time.
The question isn’t whether you’ll experience the euphoric pull of the next bull market—you will. The question is whether you’ll remember, in that moment of collective intoxication, that every party eventually ends and someone always has to clean up the mess.
