Lecture 5: Enhanced Flashcards
What is market speculation?
Market speculation refers to the act of buying and selling financial instruments with the primary objective of making profits from short-term price fluctuations, rather than the intrinsic value of the asset.
What are economic bubbles?
Economic bubbles occur when the prices of assets rise significantly above their intrinsic value due to excessive demand, often driven by speculative behavior, followed by a sudden collapse in prices.
What is investor behavior?
Investor behavior refers to the psychological and behavioral factors influencing how individuals and institutions make investment decisions, including tendencies like herding behavior, overconfidence, and loss aversion.
What are the key phases of an economic bubble?
The key phases are displacement, boom, euphoria, profit-taking, and panic.
What was the Tulip Mania and when did it occur?
Tulip Mania was a speculative bubble in the Netherlands during the early 17th century (1637) where tulip bulbs achieved prices higher than town homes in Amsterdam.
What characterized the Tulip Mania bubble and its collapse?
Prices of tulip bulbs rose to extraordinary levels due to speculation, but the bubble burst in February 1637, leading to a sharp decline in prices and financial turmoil among speculators.
How did futures contracts play a role in the Tulip Mania?
Many contracts for tulip bulbs were made for future settlement, but the lack of legal enforcement meant they were often settled for a fraction of their promised purchase price after the bubble burst.
How did the issue of scarcity relate to Tulip Mania?
Tulip bulbs, unlike land, are self-replicating and potentially unlimited, leading to limited long-run scarcity and emphasizing the speculative nature of the bubble.
What significant lesson does the Tulip Mania demonstrate about markets?
Tulip Mania demonstrated that the price of a good need not be connected to its functional utility and that greed and fear can drive markets.
What is herding behavior in investor psychology?
Herding behavior is the tendency to follow the crowd or mimic the actions of a larger group, often leading to market bubbles and crashes.
How does overconfidence affect investors?
Overconfidence leads investors to overestimate their knowledge or skills, resulting in excessive risk-taking.
What is loss aversion in investor behavior?
Loss aversion is the tendency to prefer avoiding losses over acquiring equivalent gains, causing investors to hold onto losing investments too long or sell winning investments too quickly.
What is the anchoring effect in investment decisions?
The anchoring effect is relying too heavily on the first piece of information encountered when making decisions, which can lead to suboptimal investment choices.
What is confirmation bias in investing?
Confirmation bias is seeking out information that confirms one’s preexisting beliefs while ignoring contradictory evidence, leading to skewed investment decisions.
How do emotions affect investment decisions?
Emotions such as fear, greed, and panic can drive irrational investment decisions, leading to market volatility.
What happened on Black Thursday during the 1929 stock market crash?
On Black Thursday (October 24, 1929), the stock market experienced an initial crash with the Dow Jones Industrial Average dropping 11% at the opening bell, leading to panic selling.
What occurred on Black Monday and Black Tuesday during the 1929 stock market crash?
On Black Monday (October 28, 1929), the stock market fell by another 13%, and on Black Tuesday (October 29, 1929), the market plummeted by 12%, marking the most significant drop and leading to widespread financial ruin.
How did speculation contribute to the 1929 stock market crash?
Excessive speculation and margin buying created a bubble in stock prices. Investors heavily borrowed money to invest, expecting prices to continue rising.
What economic imbalances contributed to the 1929 stock market crash?
Overproduction in industries, agricultural decline, uneven wealth distribution, and a lack of financial regulation contributed to the underlying economic weaknesses that led to the crash.
How did margin buying and broker loans exacerbate the 1929 stock market crash?
Investors bought stocks on margin, only paying a partial down-payment.
Brokers extended credit, and when stock prices fell, investors faced margin calls, causing further selling and price drops.
What was the immediate consequence of the 1929 stock market crash?
The crash triggered the Great Depression, a decade-long economic downturn characterized by massive unemployment, bank failures, and a significant decline in industrial production.
How did the 1929 stock market crash affect banks?
Many banks failed due to bad loans and panic withdrawals, leading to a loss of savings for many Americans and further exacerbating the economic crisis.
What were the key recovery efforts following the 1929 stock market crash?
President Franklin D. Roosevelt’s New Deal included programs and reforms aimed at reviving the economy, providing relief to the unemployed, and preventing future economic disasters.
What regulatory reforms were implemented after the 1929 stock market crash?
Reforms included the establishment of the Securities and Exchange Commission (SEC) to regulate the stock market, the Glass-Steagall Act separating commercial and investment banking, and the creation of the Federal Deposit Insurance Corporation (FDIC) to insure bank deposits.