. Explain the term irrational exuberance, and give an application of how it works

Expert Solution

Irrational exuberance is a term which is used to define the excitement of the investors towards a particular asset and because of the price of that assets increases and reach the level which is not sustainable technically and fundamentally.

This is a problem because it give rise to asset bubbles due to this sharp rise in price.When time comes that this bubble burst, there is a domino effect in the market and everyone holding the asset want to sell that and save its money but there are no buyers in the market.

This was the term used by Alan Greenspan, Federal chairman, during the time of dot com bubble in 1990s

There are various examples for that like dot com bubble in 1990s, 2008 housing crisis, surge in gold prices in 2011, boom in oil prices in 2014 and latest is bitcoin price rise.

All of these work under same principal. Investors become overly bullish for that particular asset at that particular time and they only want to earn more and more money and keep ignoring the negative effects of that. And once that turn comes, there is a panic situation and crisis arise.

For example, during housing booms, banks were giving housing loans to people without any credit check because they were certain that if the borrower default, they will recover the amount from the collateral i.e. house itself price of which they believe will keep on increasing. This become bubble and when it burst, they was crisis in the whole world.

Let me know if you have any doubts

jeff jeffy answered 1 year ago

Explain how open source community works in developing and maintaining a new or existing application based...

Explain how open source community works in developing and maintaining a new or existing application based on Onion model.

Give an example of how annealing is used in an engineering application. Also, briefly explain how...

Give an example of how annealing is used in an engineering application. Also, briefly explain how and why the mechanical properties—for a metal—of yield strength, ductility, hardness, Young’s modulus, ultimate tensile strength, and toughness are different for a cold worked metal vs a metal that has been annealed at a relatively high temperature for a relatively long time (must talk about grain size).

What is Data mining application and how it works in telemedicine? with example in how it...

What is Data mining application and how it works in telemedicine? with example in how it works in telemedicine

(i) Explain the term half life. (ii) Explain how radioactive carbon dating works . (iii) The...

(i) Explain the term half life. (ii) Explain how radioactive carbon dating works . (iii) The shroud of Turin is reputedly the burial garment used to wrap the body of Jesus 2000 years ago. A sample of the Shroud of Turin contains carbon 14 (C14). The half life of C14 is 5730 years and atmospheric C14 give 12 decays per minute per gram. An archaeologist measures an average decay rate from the shroud sample to be 1.5 decays per minute....

Explain and give an example of the term “materiality” (5pts) Explain and give an example of...

Explain and give an example of the term “materiality” (5pts) Explain and give an example of the term “fiduciary” (5pts)

Give one example of a government-imposed price control and explain: how it works, a situation in...

Give one example of a government-imposed price control and explain: how it works, a situation in the marketplace in which you have seen it occurring, and what effects you see.

Give an example of how Radix sort works

Provide a few examples of irrational or humanistic choices that consumers make and explain how these...

Provide a few examples of irrational or humanistic choices that consumers make and explain how these contrast with the neoclassical approach.

How would you explain the existence of the irrational fear of homosexuality that is called homophobia?...

How would you explain the existence of the irrational fear of homosexuality that is called homophobia? How does this fear affect social welfare policies?

1. Explain prospect theory. Give 1 real-life example to illustrate how the theory works. 2. Explain...

1. Explain prospect theory. Give 1 real-life example to illustrate how the theory works. 2. Explain how organizations conduct capability analysis when developing a new product. Give 1 example to illustrate your answer. 3. Discuss the customer adoption model of new products. Give 1 example to illustrate your answer. 4. Discuss the design spectrum; give an example to illustrate your answer.

Question