Dot Stock Market Crash

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Introduction

This essay will focus on behavioral bias and evaluate the bubble and market crash in its psychological aspects. One of a famous bubble was the dot.com bubble with throughout this essay, stock market trends to begin and end with periods of frenzied buying (bubbles) or selling (crashes). The herding behavior that irrational and driven by emotion and influenced the dot com bubble and burst. This essay will expected to I, explore difference phrase of Dot.com bubble and crash in which behavioral and psychological, ii, and explore how information cascades lead to herding, confirmation bias, and overconfidence in unjustified stock valuations and how this occurred in the Dot.com Bubble and Crash.

Literature review of behavioral finance …show more content…

Social influence may mean following a leader, reacting simultaneously and identically with other investors in response to new information, or imitation of others who are either directly observed or observed indirectly through the media. Social influence appears to be strongest when an individual feels uncertain and finds no directly applicable earlier personal experience.
As Hirshleifer (2001) points out, people have a tendency to conform to the judgments and behaviors of others. People may follow others without any may stampede. Shiller (2000) said that the meaning of apparent reason. Such behavior results in a form of herding, which helps to explain the development of bubbles and crashes. If there is a uniformity of view concerning the direction of a market, the result is likely to be a movement of the market in that direction. Furthermore, the herd may stampede. Shiller (2000) said that the meaning of herd behavior is that investors tend to do as other investors do. They imitate the behavior of others and disregard their own …show more content…

As the enthusiastic and social mood had slow down, the market trends turn around, those psychological based bias such herding, confirmation bias and over reaction act oppositely. It lead the technology market declined rapidly and eventually crashed.
According to Pepper and Oliver ‘a long period of rising prices is associated with an accumulation of investors who need to sell (since their holdings of money are less than the desired levels). Such investors may delay asset sales while prices continue to rise. A continuing rise in prices is likely to attract speculative investors who do not plan to hold the investments for the long term; Pepper and Oliver refer to their investments as being loosely held. A long period of rising prices would lead to many investors needing to sell shares in order to raise money for other purposes, and to many speculators with loosely held shares. When the expectation of price rises disappears, both groups of investors will sell. Share prices fall sharply’.
It is consistent to figure 1, Chart of NASDAQ closing values from 1994 to 2008. The shape depress on NASDAQ index during late 2000 to

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