Homework Help

What are some non-rational factors that may have a role in the valuation of stocks and...

user profile pic

stavia03 | Student, Undergraduate | Honors

Posted October 28, 2012 at 5:26 PM via web

dislike 3 like

What are some non-rational factors that may have a role in the valuation of stocks and stock market equilibrium?

1 Answer | Add Yours

user profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted October 28, 2012 at 5:48 PM (Answer #1)

dislike 3 like

We can see from the many “bubbles” that have occurred in the stock market (or in the prices of specific stocks) that investors do not always value stocks rationally (we have seen this, for example, in the late 1920s and in the tech stock bubble of the early 2000s).  The most common non-rational factor is the fear of losing out while others get rich.  People see that the stock market in general (or a particular stock) is going up in price.  They know that others are making money and they fear that they will be left behind.  When they buy stocks, they are assuming that the prices will continue to rise simply because they have been rising up to this point.  They are also acting based on the fear that they will be the only ones who did not make money during a boom.  In both cases, they are acting not on rational factors connected to the fundamentals of specific companies.  Instead, they are valuing the stocks based solely on hope and/or fear.

Join to answer this question

Join a community of thousands of dedicated teachers and students.

Join eNotes