1 An article in the Economist noted that while economic grow

1.

An article in the Economist noted that while economic growth in China was slowing, “stocks have more than doubled in value ”The article stated that unlike in developed countries where large institutional investors buy the overwhelming majority of the stock purchased, in China 90% of buying is done by individual investors. It described the demand the demand for stock by these investors as a“mania”

Source: “A Crazy Casino ”Economist , May 26, 2015.

What does the article mean when it describes stock buying by individual investors as a mania?

A.

Investors are purchasing stock irrationally.

B.

The demand for stock is incredibly high.

C.

Investors are crazy.

D.

Investors are enthusiastic about purchasing stock.

2. Individual investors would be ?Less??More??likely to exhibit this behavior than institutional investors.

Solution

1. D. Investors are enthusiastic about purchasing stock

This is so because investors are not irrational buyers and their actions are backed lot of fundamental and technical analysis. So, a rational investor would not take an action which will reduce his welfare or cause him loss. This reasoning also rules out the statement that the \'Investors are crazy\'. The demand for stock is incredibly high is already substantiated by the mentioned fact that 90% of the purchases is done by individual investors. Hence, the only logical explanation to the word \'mania, is that Investors are enthusiastic about purchasing stock which is the driving force behind high demand.

2. Individual investors would be More likely to exhibit this behavior than institutional investors.

This is so because institutional investors buy those stocks which have performed well in the past and get rid of the stocks which have exhibited poor returns. So their investment pattern and technique is very much different from the individual investors and is usually not influenced by the investment patterns of others, which is common among the individual investors.