Put slightly differently:  as you've phrased it, evaluation would expand each element but always start stepping into it from the very start.  That's not what happens; as the evaluator steps through the list, it throws away its reference to the earlier part completely.  So it never becomes 'f' : ('o' : ("o" ++ "bar"))) because when the evaluator is at the 'o' it has completely forgotten about the 'f'.  It's got 'o' : ("o" ++ "bar") and any remaining reference (if there is one) to the 'f' is held by something else.