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In: Economics

John Maynard Keynes once said, “The market can stay irrational longer than you can stay solvent.”...

John Maynard Keynes once said, “The market can stay irrational longer than you can stay solvent.” Explain what it means.

Solutions

Expert Solution

The stock markets rallies very fast and do not anticipate recoveries that easily .If the trade is conducted on the terms which is dependent on what the world can and and cannot afford, it can lead to dangerous consequences as the market is full of volatility. Putting your bets on the market is quite risky as one can determine whether to put bearish bet or to put bullish bet , however even when the evaluation is completely in the correct direction, the timing could go wrong leading to chances of high losses.

Thus if we conclude John Maynard Keynes we may conclude that :-

1) The nature of markets is inefficient which is subject to herd behavior .

2) Even if one uses their rational behavior to guess the direction of the stock prices , outguessing the timing of the market will increase risk of insolvency .

3) One should be very careful about using leverage because even if a person is right about the market direction, the weight of opinion can be kept from happening for an unpredictable length of time due to the volatile nature of the market.

4) One should make smart Investments ranging from short to medium term so that if the market moves irrationally and is completely against once's opinion or projections, the person could have the ease to sell those stocks to stop loss .


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