Answer to Question #6136 in Economics of Enterprise for Lamarcus Streeter
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.
Irrational 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 "rrationality" 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.