An example of financially irrational behavior is:
A)gambling in Las Vegas.
B)when a firm announces an increase in earnings and the stock price enjoys an immediate surge in value which is captured in one day.
C)when a firm announces an increase in earnings and the stock price enjoys three days of large abnormal returns.
D)Both A and B.
E)Both A and C.

Question

Quizplus · Accepted Answer

Gambling in Las Vegas is a classic example of financially irrational behavior as it involves risking one's money with no guarantee of any returns. In contrast, the announcement of an increase in earnings by a firm leading to a surge in stock price reflects the rational behavior of investors who are responding to new information. However, if the abnormal returns persist for several days, it may indicate that the market is overreacting to the news, which can be financially irrational. Therefore, option E is the best choice as it includes both examples of financially irrational behavior.

An Example of Financially Irrational Behavior Is