There are many studies on financial crisis in the literature but few have suggested a clear economic theory to explain why crises may happen and why economic recovery may take different shapes.This paper presents a new economic theory to explain the formation of a crisis and why a major crisis may take a long time to recover.It suggests that the asymmetric psychological reaction of market players to gains and losses is the principal cause of a crisis and responsible for a prolonging recovery.Three different shapes of recovery,V,U and L,are defined and explained.During the current financial crisis,some countries such as China and India may have a V-shaped recovery,and some countries such as the UK and the US may have a U-shaped recovery.An important policy implication is that effective macro-economic policies should be designed to smooth market movements and the implementation of such policies has to be counter-cyclical rather than pro-cyclical.