Are Financial Markets at all Times Rational?

Abstract

This paper discusses various reasons why financial markets are sometimes irrational. Rationality implies a cold and calculating approach to choosing investments based on risk versus reward characteristics. A rational market would display a positive correlation between risk and return. However, human beings are subject to various behavioral idiosyncrasies that may be termed “irrational.” This paper will discuss irrational behaviors in the financial market with examples. In conclusion, this researcher finds that financial markets are prone to be affected by short run irrationality.