That’s the question I want to look at today: is the market rational? If you learned economics, you will learn that many economists say that the answer is yes. In fact, a whole bunch of economic theories are built on the assumption that the market rational.
A rational market is a market in which the market participants make decisions in a rational way. For example, they will buy things when prices are low and sell them when the prices go up. Another example is people will go to the provider that has the lowest price for a particular product or service. In this market, market prices sum up all the information people need to know about something.
However, in recent years there are stronger and stronger opinions that say that the market is not always rational. In fact, it’s quite often behave irrationally. That’s especially clear if you look at the causes of the recent financial crisis, or even use sites like http://mozo.com.au/credit-cards to examine the flux in credit offers and interest rates. In hindsight, there are a lot of irrational things that caused the crisis.
Considering this, behavioral economics (which includes behavioral finance) becomes increasingly popular these days. Behavioral economics approaches economics based on the fact that people often make irrational decisions. The market isn’t completely efficient since there are many psychological factors that influence the decisions of the participants. If you want to make accurate decisions, you need to take into account these psychological factors and not just the rational factors. This way you can avoid many potential mistakes and increase your chance to achieve your goals.