Irrational Decision-Making (An Example)

Financial market can be  an example of irrational decision-making as it can, at times, get its 'pricing wrong', eg the US technology stock bubble in the late 1990s and the USA housing boom that resulted in the GFC in the late 2000s. In the latter it

"...drove hordes of unwitting investors into synthetic mortgage-backed collateralised debt obligations that blew up the global financial system in 2008..."
 John Kehoe, 2017b

These markets do not always value assets efficiently, ie owing to

"...investors are not always rational and could be overcome by emotive human psychology. They also lacked perfect information..."
John Kehoe, 2017b

This was famously called 'irrational exuberance' by a formal Federal Reserve Chairman Alan Greenspan. It is linked with herd mentality, ie follow the mob.

Thus the revered efficient market hypothesis (EMH) does not always work perfectly like in the financial market where investors lacked perfect information and people acted irrationally. Despite this, it is still is regarded as one of the best ways to price assets.

 

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