Reflexivity theory, as discussed last night, is a two-way feedback loop mechanism between expectations (shaped by prices) and outcomes (determined by actions). Why is this important? Because it shows how psychology operates under a bubble.
Professor Arnold Kling at his blog describes the relationship of price expectations and lending standards that abetted the US housing bubble which morphed into crisis in 2007-2008:
...the expectations of rising home prices helped fuel the decline in lending standards, because you cannot be punished for making a bad loan in a rising market. And the deterioration in lending standards helped fuel rising home prices, because it broadened the market to buy homes. Hence the bubble.
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