Investors gravitate towards the latest hot share even though it has never paid a dividend. Even though net income is projected to fall over the current and next several years, the price of the share continues to rise. What behavioural concept may explain this price pattern?

Question

Quizplus · Accepted Answer

This price pattern can be explained by the behavioural concept of overconfidence, where investors believe that the latest hot share will continue to generate high returns even though there are no fundamental reasons to support the increase in price. They may also feel that they have better forecasting abilities than others and therefore, overlook the potential risks involved. This behaviour can lead to irrational exuberance and contribute to financial bubbles.

Investors Gravitate Towards the Latest Hot Share Even Though It