Answer to Question #8756 in Finance for diane phllips

Question

Discuss the non-rational factors that may have a role in the valuation of stocks and stock market equilibrium. Provide specific examples to support your response.

Answer 1

Non-rational behavior of investors is shown in making investment decisions as
incorrectly pricing securities, which leads to the market inefficiencies and, in
turn, they are opportunities to make money. Such factors as fast market-changing
events that caused by the strong interest of buyers and sellers to the market
influence the valuation of stocks and stock market equilibrium. This interest
appears on the base of information from press releases, of rumors, euphoria and
mass panic. Thus person's emotions make to think that stocks are way overpriced
but buys them anyway, thinking he or she can find an even bigger fool to sell
the stock to at a profit. The UK had an example of the havoc which
"irrationality" can play with valuations in the form of the South Sea bubble.
The stock of a company which traded in the South Seas experienced exponential
price increases, leading to "bubbles"; ingenious and occasionally fraudulent
investment opportunities became the craze of the day. The shares plummeted due
to a liquidity crisis. The British government consequently passed the Bubble
Act, forbidding companies to issue stock certificates.