The best way to explain reflexivity through an example is to use real estate. Real estate enters a bubble when credit becomes cheap and easily available, as it is now. Banks look at higher real estate prices and are willing to give more credit. Their fallacy is that they don’t see the connection between credit availability and rising collateral values. The banks think collateral values are independent from increased credit. Cheap credit leads to higher prices and better credit scores which relax borrowing standards.
