2  BIS Review 85/2008  investors continued doing what they had been doing for some time, underestimating the associated (liquidity) risk and they even expanded the volume and range of their risky but profitable activities. Why did this happen? Why did investors underestimate the liquidity risks and fail to act promptly upon their sceptical views?
The answers to these questions are relevant for our understanding of why the “party lasted for so long” and why some party (that is, market) participants kept on dancing until the very end, until the music finally stopped playing. A number of reasons can help explain the observed behaviour.