Question

“Investors tend to over or underreact to information”. Do you think either of these are true and based on your answer, what are the implications for market efficiency?

Answer 1

The investors will over and under react towards the changes in the stock market. With sudden bubble growth the investors will invest more in the market. The behavioural economic theories will determine the behaviour of the rational investors. During bubble growth or crash occurred in the market, the market participants believe that something which is new to them was happening. This will induce the behaviour of the investors accompanying with changes in endocrine profiles and motivations. Most of the investors were ready to seek more information about the changing market conditions. The investors were trapped by information overload. The prior losers will be more attractive than the prior winning investors.
The market efficiency in the stock markets shows that all the information where built in the stock market. This will help the investors to take more effective decisions according to the flexible stock prices. The market will be efficient under the condition were all the information were available among the investors and stakeholders. There is no chance for market failure or any other imbalances. The price will be predetermined on the basis of the market situations.