Could SAGE Have Anticipated the 2007–09 Global Financial Crisis?

Biagio Bossone
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Biagio Bossone: Pascal, Pensées, trans. A. J. Krailsheimer, Penguin Classics, 1966, fragment 423

Chapter Chapter 5 in Bringing Sentiment into Economic Reason, 2026, pp 87-92 from Springer

Abstract: Abstract This chapter applies SAGE to a retrospective thought experiment: could the 2007–09 global financial crisis have been foreseen using the framework’s logic? It argues that key features of the crisis—such as liquidity-hoarding, asset fire sales, and investment collapse—can be understood as equilibrium responses to deteriorating sentiment and shifting expectations. The model shows how sentiment-contingent portfolio rebalancing can trigger self-reinforcing pessimism, with even small shocks generating major macro-financial consequences when trust erodes and liquidity evaporates. The chapter highlights how conventional models missed these dynamics by treating sentiment as exogenous or irrational. In contrast, SAGE formalizes sentiment as a rationally grounded yet unstable driver of expectations, capable of amplifying perceived uncertainty into systemic fragility. It illustrates how worsening sentiment undermined the perceived utility of illiquid assets and increased the demand for money, creating financial bottlenecks. By capturing the feedback loop between sentiment, expectations, and portfolio behavior, SAGE offers a structured and microfounded explanation of crisis propagation. The chapter suggests that applying SAGE ex ante could have helped identify vulnerabilities in the lead-up to the crisis—not through forecasting shocks, but by recognizing sentiment-contingent tipping points embedded in market psychology and institutional fragility.

Date: 2026
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DOI: 10.1007/978-3-032-08617-4_5

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