Question

Successful financial management requires knowledge of not only the terminology, mathematics, and techniques of financial management, but also that of human psychology and sociology. Financial and economic history in general—and market bubbles in particular—are filled with examples of both rational and irrational behaviors. Which of the following behaviors are true characterizations of a market bubble and which are false?

Behavior	True	False
Bubbles tend to end with sudden, unexpected and significant price increases, and a post-burst asset price that is greater than its intrinsic value.
Newer investors in a market exhibiting a bubble tend to realize greater profits than investors or speculators who have been in the market for a much longer period.
Later in the development of a market bubble, asset prices are affected more by the trading behaviors of inexperienced and naive investors and speculators than from the investment activities of longer-term, experienced and more knowledgeable market participants.

Answer 1

1.
Bubbles tend to end with sudden, unexpected and significant price increases, and a post-burst asset price that is greater than its intrinsic value. FALSE

2.          
Newer investors in a market exhibiting a bubble tend to realize greater profits than investors or speculators who have been in the market for a much longer period. FALSE          
3.
Later in the development of a market bubble, asset prices are affected more by the trading behaviors of inexperienced and naive investors and speculators than from the investment activities of longer-term, experienced and more knowledgeable market participants. TRUE