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Microeconomics: Principles & Policy

14th Edition
William J. Baumol + 2 others
Publisher: Cengage Learning
ISBN: 9781337794992

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BuyFindarrow_forward

Microeconomics: Principles & Policy

14th Edition
William J. Baumol + 2 others
Publisher: Cengage Learning
ISBN: 9781337794992
Chapter 5, Problem 5DQ
Textbook Problem
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You have $20,000 to invest in the stock market, which has been rising rapidly for the past 18 months. What course of action seems rational?

To determine

The action taken by an individual in the stock market.

Explanation of Solution

This question comes under behavioral economics.

In the stock market, if the price of the stock rises, investors rush to invest their money and if price of stocks falling, investors rush to withdraw their money from the markets. This is known as 'herd behavior' because when many investors buy or sell, others, like cattle, are sure to follow.

The stock market investors are the most striking example of economically irrational behavior because investors rush to sell their stocks simply because they see that others are selling...

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