Corporate Fianance and Macroeconomics

Question 1

What is a Cobweb cycle

Answer 1

The industry circles endlessly around the equilibrium but never gets to it ( i.e. shortage ( lots of demand not enough supply, all the suppliers will start producing, price decreases, surplus, lots of people producing)

Question 2

What is the recency bias or saliency bias

Answer 2

Recency bias is a cognitive bias that favors recent events over historic ones. A memory bias, recency bias gives “greater importance to the most recent event”, such as the final lawyer’s closing argument a jury hears before being dismissed to deliberate.

Question 3

How may the recency bias affect traders and CEO’s?

Answer 3

recency bias creates cobwebs:
CEO’S: the price of a good produced has been failing, CEO stops producing because it belives the downward trend will persist. All CEO’s do that, total supply falls (shortage), because it used to be so cheap demand was big
Traders: All traders sell their shares because the price has been falling,