Question

. What sorts of factors might limit the ability of rational investors to take advantage of any “pricing errors” that result from the actions of “behavioral investors”?

Answer 1

The prices of stocks may be mispriced due to the actions of behavioral investors. If the price is quoted relatively lower than the intrinsic value, then it is rational to invest in the stock. Rational investors would think that the prices increase to its intrinsic value to make a profit. It is extremely difficult to know how long does it takes for the stock to rise to its intrinsic value. The market is mostly driven by irrational people who invest with fear or greed. And, the price movement is driven by the collective wisdom of the market, which may not agree with the intrinsic value for a long time.

These kinds of factors limit the ability of rational investors to take advantage of any "pricing errors" that result from the actions of "behavioral investors".

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