Which of the following is not a likely explanation for the bubble and crash pattern frequently seen in markets for financial assets?
A) Traders chase speculative gains.
B) Traders have adaptive or trend-following expectations.
C) Traders may all be rational but they are not convinced about the rationality of everyone else.
D) Traders have rational expectations.

Question

Quizplus · Accepted Answer

The bubble and crash pattern in financial markets is often attributed to speculative behavior, trend-following, and doubts about others' rationality, rather than traders having rational expectations. Rational expectations theory suggests that individuals make decisions based on all available information and a rational understanding of the market, which would theoretically prevent bubbles and crashes caused by irrational speculation or herd behavior.

Which of the Following Is Not a Likely Explanation for the Bubble