Keynes argued that because the future is uncertain (we can’t know anything for sure), people tend...

Keynes argued that because the future is uncertain (we can’t know anything for sure), people tend to use heuristics (rules of thumb) to help them make decisions. Explain two of the five heuristics we use for decision-making. Explain how the heuristics can lead to volatile financial markets.

Expert Solution

Heuristics are strategies for mental processes that an investor use in order to make different kind of decisions, which are related to his investing strategies.Since, there is a lot of uncertainty in the future, these heuristics helps the investors and the common people to make such decisions which are complex in nature in order to proactively manage those futuristic event in estimation and proactiveness.

Two heuristics are-

1. The availability heuristic-this is based upon how easy and quick, it is to bring some information to human beings mind while making decisions. When human being is making some decisions based upon availability he will get knowledge of various types of past and remembrance of various events which have happened in his past so that would influence his overall decision making capability.

2. The affect heuristic-this involves making choices that are strongly influenced by emotions that the individual is presently going through.this is based upon the emotion making analysis like when an investor is in positive mood, he will make decisions related to investment and when he is in negative mood, he will prioritise the risk, and go against the decision of making an investment.

These heuristics can affect the financial market to a large extent because financial markets are emotion driven and mostly the affect heuristic will help and affect the volatility because it will react based upon the news and sentiments rather than the actual substance. These heuristics lead to a volatile Financial Market by influencing the overall investors sentiments.

jeff jeffy answered 1 year ago

How can we be CERTAIN we know anything at all?

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