What Contribution Can Behavioural Finance Make to the Explanation of Stock Market Bubbles and Crashes?

There are primarily two theories as to why the stock market crashed in 1929, affecting innumerable people in the United States and around the world. One speculation to how the devastating catastrophe transpired is driven by the idea that there was an over-production of goods and services and an underconsumption by the people, creating a plummeting bubble; consumers held on to their money and stopped investing, hoping that the market would stabilize. Another common conjecture is the belief that the Great Depression was provoked simply by normal recession, within the business cycle, and was brought about by poor policy on the behalf of the Federal Reserve. Many believe the crash was frankly unavoidable because of the unprecedented combination

In Document 5, by Harry J. Carman and Harold C Syrett, A History of the American People, 1952, stated that, “As more investors put their money into securities (stocks) in the hope of making a quick profit on a speculative rise in stocks,... the exchange became a betting ring where people gambled on stocks in much the same fashion that gamblers wagered on roulette or horse races.” Investors would buy shares not knowing if the company would make a profit, making it dangerous. Stocks would go up because buyers believed that they will be able to sell it for more next time. When things are going well, consumer confidence is high and people buy.

While there may be some arguments among historians, speculation is obviously one of the major causes of the Crash. Speculation (In the context of the stock market) is the buying of stocks with the purpose of profiting not from the dividends that the stock pays, but by the fluctuations in the price (Axon 31). Speculation is often looked down upon by the market as a profession, as it is seen as a form of gambling with possible serious repercussions. The secret is that speculation is actually

There were many historical circumstances that caused the failure of the stock market in 1929. One of the major reasons for this collapse was speculation and irrational exuberance of the stock market in the 1920s. The stock market boosted the confidence of many individuals in the United States for gaining tremendous wealth because of its growing success in the economy. Therefore, many people placed

Financial Assets: Robert Shiller, a Noble Prize winner in Economics, has the belief that our cultural and psychological thoughts influence our financial behavior. Shiller highlights the key factors of the irrational exuberance that exists in the financial market. In his book, Irrational Exuberance, he argues that investors often make irrational decisions. Throughout the book, he explains that there are twelve factors that impact the market behavior from 1995 to 2005 and that eventually led to a financial bubble. Some of these factors can be linked to the Black Thursday of 1929.

Moreover, by mid-20s, stock market were the largest playground when about 3 million Americans bought stocks with money borrowed from the bank, also known as “buying on margin” which is the same method as the installment plans, but without having general knowledge about its real value nor their own profit value from the stocks they bought, there was just only one thing in their mind: “The more stocks you buy the faster you are going to be rich” and that is what matters to them, but the banks themselves favored real estate investment over commercial ventures, which was to open more opportunities for private businesses. Thus, if the market goes down and holders decide to sell his or her stocks then there would be more sellers than buyers and the

Bierman argues that the overall stock market was not “excessively high” in September of 1929 and he even explains that the business outlook was favorable. Therefore, the crash did not occur because the market was too high. However, at least one section of the market (public utilities) was too high and too levered, and the stage was set for the selling panic by the press and the governmental officials repeatedly speaking of an orgy of speculation.

The economic growth caused people to think that investing in the market is just a hobby. The people in this time had thought that anyone could make money in the market. People at this time were careless about how they invested their money convinced that it was “easy money”. This thought process caused the general population across the U.S. to plunge into the market. Some people even invested money that they did not have, thinking that they would pay their debt later when they gained money. An effect of the general population investing in the market was that it caused oversupply in many companies. The companies would acquire this money from investors and have too much of it, creating oversupply of many goods. These businesses were forced to dump their products in mass and at a loss. While this was happening, stocks still continued to rise, giving companies even more money that they did not know what to do with (“What caused”). The stock market bubble finally burst on October 24, 1929. On that day, investors began dumping shares in the mass, and it is known as “Black Thursday”. A record of 12.9 million shares was traded that day, making many people terrified, creating a wave of panic. This happened again on October 29, 1929 as some 16 million shares were traded. This date is acknowledged as “Black Tuesday”, and caused another wave of panic (“STOCK MARKET CRASH OF 1929”). Truly, these days will be remembered

First signs of economic trouble were shown when steel production, house construction, and car sales went down in early 1929, but very few people noticed this as a problem at the time. In March of 1929, the stock market did have a small crash, but Charles E. Mitchell essentially stopped the crash by continuing to loan out money even though many broker were issuing “margin calls. After Mitchell’s actions the stock market began to climb once more. Some economists were giving warning of a possible crash in the future, but they were all dismissed as many people did not want to believe it, especially with the price of stocks soaring shortly after the small crash. However these few economists were right about a future crash, throughout the month of September stock prices fluctuated and eventually crashed on Black Thursday (October, 24, 1929).

Another big problem that led to the Stock Market Crash was public misconception. The general conception was that the stock market was an easy way to make money. People began believing that stock prices would go up forever. As a result, many people bought publicized stocks

It is often said that perception outweighs reality and that is often the view of the stock market. News that a certain stock may be on the rise can set off a buying spree, while a tip that one may be on decline might entice people to sell. The fact that no one really knows what is going to happen one way or the other is inconsequential. John Kenneth Galbraith uses the concept of speculation as a major theme in his book The Great Crash 1929. Galbraith’s portrayal of the market before the crash focuses largely on massive speculation of overvalued stocks which were inevitably going to topple and take the wealth of the shareholders down with it. After all, the prices could not continue to go up forever. Widespread speculation was no doubt a

Investing in the Stock Market was extremely popular in the “Roaring 20’s,” but no one actually knew the devastating impact the stock market would have on the economy. The Stock Market was purely a “speculative bubble”, where people would take risks in buying and stock markets hoped that prices

Further to the argument that agents were ignorant of and failed to engage with new information, the formation of asset price bubbles has been offered as a cause for the GFC. Ball argues that it is inherently difficult to recognise the presence of an asset price bubble until after the event has affected the market and even by recognising that prices did not accurately reflect true value, this could never have indicated a nearing price bubble burst to investors because EMH suggested that all then available information was

3. Why did influential individuals like Fisher, Keynes and Rockefeller believe that the downturn would only be temporary?

Now that the two theories have been explained, let’s look at some historical examples from Malkiel that really paint the picture in chapter 2. The first speculative craze noted was over tulips in the seventeenth century in Holland. The tulips were brought from Turkey and the Dutch valued the beauty and rarity of the new flowers. Thus the prices for the flowers inflated. As the prices rose merchants would by stockpiles to sell to the public. The more expensive they got the more the public believed they were making smart investments. People would sell off the personal belongings to get their hands on the bulbs. The mania surrounding the bulbs created a bubble that would soon burst. The prices got so high some people decided to cash in and sell them to make a handsome profit. Soon others joined in causing a snowball effect and the prices tumbled. Eventually there was no demand and they were worthless. Many went