Explain how investors are influenced by attributions about fluctuations in the stock market

Question

What will be an ideal response?

Answer 1

When stock prices increase and decrease, the attributions that people make about
these fluctuations play an important role in their investment decisions. If they attribute
these increases and decreases to general causes that are likely to persist, rather than to
specific causes for which they have clear explanations, they are more likely to follow
the flow of the marketplace and buy stocks when they are rising and sell them when
they are falling (thereby violating the conventional wisdom of trying to buy low and sell
high). For example, a person with money invested in Stock X who learns that its price
has dropped for three consecutive days is more likely to sell if he or she attributes the
drop to some world event. Indeed, when many people make the same attributions, selffulfilling prophecies begin to emerge. Let's say that a large number of investors believe
that Stock X's decline has resulted not from the typical fluctuations of the stock market
but instead from some new technology that has been developed or some war that is
brewing? these investors are likely to sell their stock, causing the price to drop further,
which in turn seems to confirm their original belief about the stock. If, in contrast, they
attribute the decrease to a less serious matter, they are more likely to avoid panic and
to rely on the more economically sound principle of buying low and selling high.