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Why do entrepreneurs make bad investments during the boom period? Doesn’t the market weed out those who make poor forecasts?


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#1 Murphy

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Posted 09 September 2005 - 10:21 PM

Why do entrepreneurs make bad investments during the boom period? Doesn’t the market weed out those who make poor forecasts?

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Posted 06 October 2010 - 04:03 AM

View PostMurphy, on 09 September 2005 - 10:21 PM, said:

Why do entrepreneurs make bad investments during the boom period? Doesn’t the market weed out those who make poor forecasts?

Entrepreneurs are faced with individual decisions on a micro level even if they are aware that the market sends false signals on a macro level. For example, if an artificial boom is created by lowering the interest rates below the natural rate and the demand for capital goods increases, entrepreneurs cannot simply refuse to sell capital goods to their customers, since they are otherwise driven out of business. The same is true for the financial business. Fund managers who think that the increase in stock prices during an artificial boom will not last and, thus, sell their stocks will lose money and customers. Actually, as long as the artificial boom lasts, those who are most tended to take advantage of the boom will drive those out of business who are most skeptical about it.





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