Behavioral economists argue that asset price bubbles and other examples of herd behavior may be due to biases resulting from the law of small numbers. In particular, the investors may observe unusually ________ returns for some asset and use this limited information to ________ the probability that returns will be high in the future.
A) low, over-estimate
B) low, under-estimate
C) high, over-estimate
D) high, under-estimate

Question

Quizplus · Accepted Answer

The investors may observe unusually high returns for some asset and use this limited information to over-estimate the probability that returns will be high in the future. This aligns with the concept of the law of small numbers, where people tend to generalize from small samples and assume that the same pattern will continue in the future.

Behavioral Economists Argue That Asset Price Bubbles and Other Examples