If the markets behave rationally and if investors are rational answer the following:
Why are there such big moves in stocks that are supposed to be "fairly priced" at all times?
Rational is not the same as realistic. There is a lot of propaganda going on in financial markets that often deceives investors.
Rational behavior based on false perceptions is no different from irrational behavior in its consequences. Which means deceived investors acting rationally can end up bidding up stock prices to irrational levels. Which has happened most spectacularly during the dot com boom. But this kind of thing happens in financial markets all the time to some degree.
The problem is that stock market investors try to predict the future when they buy shares. Nobody knows the future for sure. And in these circumstances it’s relatively easy for various players in the stock market and for the government to manipulate people’s expectations of the future.
Such attempts at manipulation don’t work every time. But it usually does work for some time, before people learn from their experience. Then some more time passes by. Some people leave the stock market or forget their experience. New people enter the stock market. And the manipulation begins to work again.
February 25th, 2010 at 9:36 am
Because they do not behave rationally – especially in the short term.
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February 25th, 2010 at 10:01 am
Well first and for most investors are human and thus do not behave rationally in most cases. However let’s say they do; its information that makes the difference. If not all investors have access to all relevant information then they will not have the same expectations for the stock and thus the stock will never truly be fairly priced. Its efficiency vs. rational and they aren’t one in the same.
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February 25th, 2010 at 10:26 am
Yes like the others above people dont act rationally,
People are very tied to EMOTIONS, you see most people buy some stock, usually in a company whose name they know. they buy thinking it will rise in price, (who wouldn’t). which is great.
However they don’t, (before putting money in) consider things like. What to do if the price falls, what to do if the price rises and what to do if the price does nothing.
So when something happens, they freak, because theyre afraid of losing out, and also they can become Greedy and want more and more, not considering that when a price stops moving up, it naturally comes back down.
Basically the price is based on what the masses are thinking and doing. (people are dumb panicky animals and you know it -MIB). If you tell a crowd that a stock is about to move, they go out and buy it, Naturally the buying pushes the price up, others see this and go and buy, pushing the price up, and then eventually the price stops going up, at some point the people wanting to sell the price overcome the people buying and then the price slides a bit, the same crowd see this happen and Sell their shares, so the price drops, and other see this and sell and the price drops…..
that is how the price of a share moves.
References :
Hometrader and other stock books and resources
February 25th, 2010 at 10:45 am
Rational is not the same as realistic. There is a lot of propaganda going on in financial markets that often deceives investors.
Rational behavior based on false perceptions is no different from irrational behavior in its consequences. Which means deceived investors acting rationally can end up bidding up stock prices to irrational levels. Which has happened most spectacularly during the dot com boom. But this kind of thing happens in financial markets all the time to some degree.
The problem is that stock market investors try to predict the future when they buy shares. Nobody knows the future for sure. And in these circumstances it’s relatively easy for various players in the stock market and for the government to manipulate people’s expectations of the future.
Such attempts at manipulation don’t work every time. But it usually does work for some time, before people learn from their experience. Then some more time passes by. Some people leave the stock market or forget their experience. New people enter the stock market. And the manipulation begins to work again.
References :
February 25th, 2010 at 11:09 am
It’s all the stupid people using e*trade who know nothing about economics.
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February 25th, 2010 at 11:18 am
The markets don’t behave rationally in the short run. Individual stocks can be priced too high or too low at any point in time, creating an incentive for future buy/sell decisions that will put the prices back on track in the long run. I believe that the markets overall (not individual prices) tend to overreact to daily news.
Look at how stock trades work. Most of the dollar value of trades are made by large institutions, and these institutional trades are definitely large enough to affect the market price. Institutions make large trades for a variety of reasons that seem rational to them for other reasons than just the prices of individual stocks. For example, they may decide that it is time to rebalance their portfolios, and sell from one segment in order to purchase from another. They may rebalance between cash, bonds, and different types of stocks. Also, they may have received a large influx of cash with client expectations of investing immediately in the market, or they may need to sell shares to meet a large withdrawal of cash. As one investor buys what another sells, the strategy of the stock’s owner will likely change. When looking at a company’s stock, one investor may see a bargain in the long run while another doesn’t. All of these decisions will have an effect on individual stock prices for reasons that include other things than just the current stock price.
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