Economics of Crowd Behavior in Financial Markets

This report delves into the economics of crowd behavior within financial markets, using the 2008 subprime mortgage crisis as a case study. It explores how the 'wisdom of crowds' can lead to both beneficial and detrimental outcomes, particularly during market bubbles and crashes. The research methodology employs an interpretivist philosophy and inductive approach, utilizing secondary data and thematic analysis. The report examines the role of social influence on investment decisions, the impact of following market trends, and the importance of expert opinions, such as the Delphi technique, in mitigating risks. It concludes that while collective opinions can be valuable, they are not always reliable, and investors should exercise caution and seek expert advice to make informed decisions.

ECONOMICS-
FOLLOWING THE CROWD
CAN BE BENEFICIAL AS
WELL AS FOOLISH IN
FINANCIAL MARKETS
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TABLE OF CONTENTS
CHAPTER 3: RESEARCH METHODOLOGY.............................................................................2
Introduction............................................................................................................................2
Research philosophies............................................................................................................3
Research approaches..............................................................................................................4
Research strategies.................................................................................................................5
Research choices....................................................................................................................5
Time Horizon..........................................................................................................................6
Techniques and procedures....................................................................................................6
Research Limitation................................................................................................................8
Ethical consideration..............................................................................................................9
CHAPTER 4: DATA ANALYSIS AND FINDINGS...................................................................10
Introduction..........................................................................................................................10
Data analysis and findings....................................................................................................10
CHAPTER 5: FINAL DISCUSSION............................................................................................21
Introduction..........................................................................................................................21
Conclusion and discussion...................................................................................................21
REFERENCES..............................................................................................................................24
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CHAPTER 3: RESEARCH METHODOLOGY
Introduction
Research is an in-depth analysis of the topic through application of variety of tools and
techniques in a well formatted manner. Research methodology is a section which helped the
researcher in fulfilling all the above requirement for the study. It is a detailed plan and procedure
to analyse the research problem and developing effective design for the same in order to attain
the effective result (Green, Camilli and Elmore, 2012). For the present study this section will
help in developing a detailed analysis of various tools and techniques that the researcher will
implement in order to develop an effective result. The current topic of the research is to examine
the economics of wisdom of crowd within the financial market. In order to attain the research
aim, researcher will apply research onion which is a well-developed and formatted approach to
structure the study and analyse key aspects for designing it.
Illustration 1: Research onion
(Source: Green, J. L., Camilli and Elmore, 2012)
Research philosophies
According to Johnson and Christensen, 2008 research philosophy develops a cluster of
beliefs which helps in effectively structuring of the overall research and develops a formatted
measure to approach research problem. This outermost layers develop a strong basis for the
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research and analysis various means of data collection sampling etc. There are majorly two types
of research philosophies which are positivism and interpretivism. Positivism is an effective and
factual research philosophy in which researcher implement scientific measures and actual data to
attain results. Interpretivism on the other hand, is the philosophy where research findings are
derived through effective and in-depth interpretation. This method undertakes different social
perception and theories under consideration (McBurney and White, 2009). It helps in developing
a subjective research analysis.
The present study focuses on analysing the impact of wisdom of crowds on financial
market (bubble and crashes). In order to carry out the proposed research study interpretivism
philosophy will be applied. It will be an effective measure to deal will the social approach and
deliver a subjective result for the given study. Positivism on the other hand, is a rigid and
inflexible philosophy which demands strong scientific theories and factual figures for the
research. Current topic attempts to prove a social perception in financial market hence positivism
will not be effective for the same. It will be unable to focus on the social thinking and crowd
behaviour in order to deal with the research problems efficiently.
Research approaches
The next layer of research onion is research approach which develops an effective a clear
analysis about research design. It helps the researcher in properly structuring the study to attain
reliable research results for the study. Merriam, 2009 has segregated research approach into two
major segments which are effective and well developed for the research analysis. Inductive and
deductive research approach are different types of approaches which research implement to
design the study efficiently. Deductive approach is the on which demands specific design and
procedure to carry forward with the study. It focuses on developing a causal relationship between
variables to attain specific results. For this, researcher develop hypothesis on the basis of
research objective which develops a conceptual relationship with elements of the study. In
contrary to this, inductive research approach focuses on conducting the research to attain general
perception or theories which are applicable in similar industries or situations (Denzin and
Lincoln, 2011). This approach adopt research questions or theories to support the study and
resolve research problem.
The aim of the present study is to investigate financial markets where bubbles and
crashes influence profits and how following the crowd can be beneficial as well as foolish. The
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topic demands effective social influence for the research. Hence, in order to conduct the stated
research inductive approach will be applied. For this qualitative data will be used thus conclusion
will be drawn applying the same. Deductive approach demands effective formation of hypothesis
for the study which is ineffective for the present topic. The researcher will effective use
secondary data to analyse and evaluate the impact of social perception on overall profitability
within the financial market.
Research strategies
According to (Sharma, 2001) there are numerous ways of conducting research in order to
attain the effective findings which may help in resolving the issue. Research strategy helps in
finding significant differences in those ways and selecting the most suitable design for the study.
This helps in creating a well-developed research report for the study. Various types of research
strategies implemented while conducting the research are exploratory, descriptive, case study
analysis, casual research etc (Sharma, 2001). this helps the researcher in attaining effective
research goals. For the present study, exploratory research strategy will be applied. This will help
in effective developing base for conducting research on the basis of research questions and
seeking relevant results for the same. Moreover, this strategy will be effective to attain the aim of
the study in an efficient manner.
Descriptive analysis is a strategy which uses different theories and apply measures to
check the relevancy of the same. The present research is trying investigating the impact on
collective decisions on profitability in financial market. The research attempts to prove a
completely new theory. Case study analysis is a strategy where any particular case is taken as the
base and research is conducted on that segment to testify the application of tools and techniques.
This strategy is not relevant for the present topic hence the researcher has adopted exploratory
research method which is most effective and appropriate method to attain research result.
Research choices
This layer of the research study focuses on analysing different methods to conduct and
carry out the research in order to attain the effective and valuable results for the study. It focuses
on analysing the tools and measures implemented in order to conduct and carry out the study. .
Choice of the research is totally depends on the available time and money as well as aim and
objectives of researcher (Sharma, 2001). The present research focuses on investigating financial
markets where bubble and crashes influence profits and examining how following the crowd can
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be beneficial as well as foolish. In order to attain the stated research aim researcher has various
choices such as qualitative method, quantitative method, mixed method etc.
The present study will adopt qualitative research choices. This will be effective and
favourable for the present research topic. The study seeks to link the social perception with
financial investment patterns. The topic will be well defined and examined through application
of qualitative method. This method will be using interpretative measures to attain research
results. Moreover, examining and linking research patterns will be effective for attain the
research results. Quantitative method on the other hand demands wide quantitative data which
can be used for effective analysis and conclusions are mad using quantitative and statistical tools
such as descriptive statistics, mathematical models etc. In order to analyse the effectiveness of
wisdom of crowds the researcher will use the comparative analysis of secondary research data ad
effective conclusions will be attained for the same. Hence, qualitative analysis will be effective
and appropriate for the present study.
Time Horizon
This layer of research onion focuses on analysing the time horizon for which the research
will be carried out. Time horizon for the research helps the researcher in developing effective
measures to carry out the research in an effective and well developed measures. According to
Crowther and Lancaster (2012) time horizon of the research are characterised into two broad
categories which are cross sectional and longitudinal. This categorization helps the business unit
in developing an effective impact on analysing effective means of conducting the research.
Longitudinal researches as per the Daniel and Sam, (2011) are those which are carried out by the
researchers for a very long period. The topic of these researches are considerably wide and these
types of researches are generally stretched for a year or a decades even to attain the objectives.
Cross sectional research on the other hand are those researches which are carried to attain
specific objectives or purpose. The topic of these research is specific and generally focuses on
attain research aims and objectives for specific period of time.
The aim of the present study in to analyse whether the following crown is foolish or
beneficial for investors with reference to bubbles and crashes in the financial market. The topic
of the research is very confined and specific. The researcher will effectively carry out
exploratory research. The cross sectional time horizon will be applied for the study as the
research aim reflects specific research issues which could be analysed through specific data
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search and analysis. The longitudinal time horizon will not be applicable for the research as the
topic clearly specifies the research issue which is specific and limited. Repeated researches
cannot be carried out on the research in an extensive way. Hence, for the present cross-sectional
time horizon will be applied in the study.
Techniques and procedures
Data collection
Data collection is one of the most significant function of research study. It helps the
researcher to gather specified and significant information which reveals all facts and figures
related to the topic thus helps in attaining research results. According to AUTHOR data
collection is carried out using different methods and tools (Dey, 2002). Primary and secondary
method of data collection are the two most significant methods of data collection. Primary
method is one where the data is fresh and collected for the firm time from public. Researchers
collect this data using tolls such as questioners, surveys, interviews etc. both qualitative and
quantitative data is collected through this approach. It helps the researcher in attain appropriate
and reliable data for the research however social factors such as influence, fear, ignorance and
behavioural factor leads to the error in the data hence this may prove be a limitation of the
research (Kumar, 2014). Secondary research on the other hand is the one where past data is
collected and used for the research. Here the researchers collect the secondary i.e. past or used
data in order to carry out the research. This approach is highly reliable and authentic if sources of
data are valid.
For the current research secondary data collection measures will be used. The researcher
will collect the past data for the research in order to attain the research objectives. This will help
in attaining the research aim efficiently for the researcher. The research topic focuses on
applying the social perception in the financial market. For this purpose secondary data collection
approach will be highly effective to gain effective data results. In order to attain the research aim
the researcher will review the sub-prime crises of the year 2008. This case will help in
developing an effective clear understanding about the topic. Primary research will not be applied
for the study as the research topic specifically focuses on analysing financial market. Primary
data will not be useful to analyse the situation effective for the present research. Hence,
Secondary research has been used in the present research study.
Sampling
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In order to carry out the research in an effective manner proper and well developed
sampling measures are to be adopted by the organizations. The present research topic will be
attained by carrying out extensive research study on the topic utilising secondary research data.
The researcher have critically examined the subprime crises of the year 2008 in order to attain
the research objective in an effective and well developed manner. In order to carry out the
current research the researcher will undertake the banks which were highly impacted by the
occurrence of sub-prime crises in the year 2008. This will help in analysing the impact of social
influence on the investment decisions. Through analysing different scenario, researcher will
analyse the impact of decisions made by the crowd. Moreover, the research will use the
secondary data to analyse and evaluate the impact of following the crowd on the returns of the
investors.
Data analysis
This segment of the research is crucial and significant for effectively representing the
finding and developing an effective and clear understanding about the same. The two major
approaches employed for data analysis to attain effective results are quantitative and qualitative
method (Golafshani, 2003). Quantitative method involves critical analysis and interpretation of
figures and numbers, and attempts to find rationale behind the emergence of main findings. It
uses mathematical and statistical tools and techniques to attain the results for the research
problem. Data interpretation in this method is carried out through graphs and tables in order to
achieve research aim. Qualitative analysis on the other hand uses tools such as interviews,
surveys, case analysis or experiments to interpret research results efficiently.
The current research will use qualitative method in order to interpret data and attain
research aim. The research study will adopt thematic analysis measure in order to develop a well-
defined research structure. This method will develop research results and data analysis on the
basis of different themes which will be effective for attaining wide and effective research results.
As per the technique, number of themes regarding issue into consideration is prepared by the
researcher. This method will help the scholar to get deeper insights about the respective problem
as well as in making appropriate conclusion too.
Research Limitation
Accomplishing research in an effective manner poses wide challenges for the researcher.
It is not easy to effectively analyse and evaluate the data in order to attain the effective research
8

results. To attain the research objectives in an efficient an effective manner the researcher has to
closely examine all the factors associated with the study (McMillan and Schumacher, 2014). The
present research was not a easy task to perform. There were variety of research limitation
associated with the same. The major limitations of the present research are as follows: Limited time: the availability of the time was one of the major issue to carry out the study
in an effective manner. Due to lack of time availability the researcher was able to carry
the research in a limited and defined spectrum (Saunders, 2003). Author has conducted
brief research on each and every aspect of the current subject. It can affect the quality of
work and final findings also.
 Choices of data collection: The choice of secondary data collection method will help the
researcher in attaining effective results however these results will be based on one issue
which took place in the recent past. The research result will thus be focused on the
limited analysis (Vaivio, 2008). Moreover, the other constraints of the research resulted
in limiting the stated factor in the effective manner.
Ethical consideration
An effective research study demands a definite analysis and research study. Often
common research errors or small ignorance may result in creating wide issues for the research
reliability and results. Different authors and researchers have developed a well developed
research study in order to attain effective research results. According to Goddard and Melville,
(2004) ethical consideration is one of the most crucial and significant factor for determining
effective and valid research results for the study. The present research has been carried out in an
ethical and reliable manner in order to effectively attain research results. All research data and
results has been carried out in a well developed manner for the present study.
The current study has followed all the ethical guidelines and principles to carry out the
present study. Plagiarism and data manipulation are the key issues involved in researches. For
the present study the researchers focused on collecting data in an effective manner and proper
citations and referencing has been done in order to avoid such issues. The data has been used in
an effective and actual manner without manipulation of any data. Moreover, all the data has been
collected from the reliable and authentic sources which enhances the reliability of the research in
an effective manner. All the secondary information has been collected from the publicly
available information and the researcher has not used any controversial data for the study. The
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conclusion and recommendations are based on the overall analysis hence the research is said to
be well developed and effective for academic as well further research reference.
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CHAPTER 4: DATA ANALYSIS AND FINDINGS
Introduction
Data analysis is a process of evaluating the data collected from different sources using
different tools and techniques in order to attain research results. This section of the study
develops an in-depth analysis of the research in order to attain the well developed research result.
Thematic analysis has been done using secondary data and a well designed data analysis has
been developed from the same. The above mentioned measure helped in attaining a appropriate
finding for the conclusions and recommendation section of the study.
Data analysis and findings
Theme 1: Overview of sub-prime crises
Sub-prime mortgage crises of 2008-10 exposed a major flaw in the credit lending policies
of investment bankers and credit lending agencies which created a wide impact on European and
American economy. In the year 2002-2005 high risk mortgages became available within the
economy. New financial products were used to apportion the risks with private-label mortgage-
backed securities (PMBS) providing most of the funding of subprime mortgages. These
instruments were considered risk free as they were insured by the financial lenders. It helped in
making houses available to the lower class and middle class people at a minimal interest rate
(Who Is To Blame For The Subprime Crisis, 2015). The availability of houses at low market
rates exploded market demand for the loans which were supplied at poor credit. Increasing
market demand developed a housing bubble within the economy which was hiked up in the year
2005. Poor credit within the market made the market collapsed and resulted in bankruptcy of
companies. The event was succeeded with much awaited economic recession within the market.
As per the researches central bank flooded the economies with capital liquidity in early
2000s through lowering rate of interest within the economy. The investors took riskier
opportunities in order to reinforce their returns on investment. Lenders on the other hand were
fulfilled with the availability of capital to lend which convinced them to take additional risks for
higher returns (Behind The Scenes Of Your Mortgage, 2015). Throughout the market funds were
flowed without well developed foundation. Fall in interests rates resulted increasing demand for
mortgages which resulted in enhancing the housing prices. Lenders followed the opinion of the
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crowd to perceive subprime mortgages as less risky relying on factors such as low rates, healthy
economy and credit worthiness of people. This resulted in rising mortgage origination highly.
The figure clearly represents mortgage origination from the year 1994-2006. It represents
that the amount in the year 2001 was $173 billion which outgrew to $665 billion in the year
2005. The immediate hike of 300% subprime mortgage resulted in creating huge vacuum within
the economy. The graph clearly represents a relationship between liquidity and loan origination
within the economy.
Theme 2: Wisdom of crowds played leading role in sub-prime crises
From the above overview it is evident that lenders of the loan played a significant role in
making economic revolution within the economy. Providing low rates mortgage loan developed
accumulated poor credit within the economy. Moreover, these actions developed a momentum of
demand within the society (Wisdom of Crowds, 2008). Home-buyers played a leading role in
spreading the fire of crisis within the market. They played a risky game by buying unaffordable
houses for reselling. These situations developed a new concept of mortgage and home-buyers
adopted non traditional measure of mortgage where the initial cost of buying the product was
minimum or considerably low (e.g. No down payment) and the introduction cost was low as
12
Illustration 2: Subprime mortgage Origination
(Source:Who Is To Blame For The Subprime Crisis. 2015)

well. They waited for prices to appreciate in the market in order to refinance at lower rate and
make profits out of the same to make money for spending.
This resulted in creating housing bubble which soon burst creating a vast vacuum within
the economy which resulted in crisis f 2008. The prices dropped rapidly and homeowners were
unable to refinance their mortgages. This resulted in increasing the default in mortgages within
the market hence resulting in increasing prices in the year 2006-07.
13
Illustration 3: Housing Bubble
(Source: Behind The Scenes Of Your Mortgage. 2015)

A stock market is effectively linked with speculation and pricing bubbles which may
bring about a social influence within the market. However, the concept of housing finance was
never estimated to be affected by market price fluctuations. The reduction in the prices of houses
was a theory which nobody assumed could arise. The reduction in interest rates developed a huge
impact on the housing economy by creating an effective imp-cat on the growth and development
of the economy. Home owners followed the crowd opinion for investing within the market and
triggered a housing price bubble within the market. This bubble attracted investors for
investment within the market irrespective of the consequence (Moral Hazard and the Crisis,
2010). This resulted in bubble burst with huge consequences in long term averages. The critical
housing decisions made on the investment pattern was not wise by the people as they did not
logically compare and analysed the decision with long term average returns. This gave a huge
14
Illustration 4: Bubbles and crashes
(Source: Moral Hazard and the Crisis. 2010)

setback to the economy resulting in increasing mortgage defaults by the investors and fall in
housing prices as well.
Theme 3: Case analysis of investment banks
Increasing demand of mortgage within the market resulted in enhancing the use of
secondary mortgage market. The investors sold the mortgage in the secondary market in order to
collect the originating fees generating form the same. This created huge impact on the market
resulting in creating all the more liquidity. This made more capital available for further
investment. The increasing demand of mortgages resulted in pooling these mortgages together
and developing security for the same. Collateralized debt obligation (CDO), mortgage-backed
security (MBS), asset-backed security (ABS), collateralized mortgage obligation (CMO) etc
were the craved securities for the same. Investment bankers bought mortgages in oredr to
scrutinize those as bonds. The figure belo clearly represents the rise of CDOs in the year 2006.
The purchase decisions of the investment banks was not effective for enhancing profits in
trading. This resulted in creating a vast impact on the growth and development of the economy.
The banks did not effectively assume the crisis within the market and ineffective investigation
and social influence resulted in the occurrence of crises widely within the market. These issues
resulted in creating huge demand and supply gap within the market.
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The collapse of Lehman brothers can be effectively considered for the same. The market
revenue of the firm resulted in fast growth in the year 2004-2006. The organization assumes a
growth rate of 56%. The firm securitized $146 billion of mortgages in 2006, a 10% increase from
2005. The organization earned record profit from 2005-2007. the balance sheet of the
organization had grown bigger with time due to effective and well managed earnings in due
course of time. However, in the first quarter of 2007 the defaults on mortgages started appearing.
Rising defaults directly affected the profitability of the bank as the creditability f the firm was
based on repayment of the loans. The portfolio of the bank consisted of majority of mortgage
shares. In the year 2007 the shares of the company rebounded on the basis of fixed prices profits
however the company did not trim its mortgage portfolio which resulted in collapsing the firm
and resulting in bankruptcy. This case clearly reflected that the obvious indication of downfall
were not well entertained by the firm due to social influence and expectation of higher profits
due to ongoing market trends. This was the first firms with such huge implication. The era of
sub-prime crises resulted in huge failure for many other companies and investment banks as
well.
Theme 4: Social influence in sub-prime crises was significant
The analysis of financial crisis of the year 2008 clearly represents the theory that the
issues raised within the market as the major banker and government polices went against the
estimated results by the organization. The economics of Wisdom of crowds as per the Walter and
Back, 2010 is a collective opinion of a group of individuals for making a common opinion about
the subject or given problem. For the selected issue the investors who suffered heavy losses were
16

well aware of the concepts of financial market and investment decisions. The technical theories
linked with pricing bubble within the market was highly effective and significant. Majority of the
companies in the economy were investing in the mortgage securities in order to earn high profits
and earnings (Wisdom of CrowdsInsight: When the wisdom of crowds becomes the madness of
mobs, 2009).
Moreover, the portfolios of the investment banks were designed and developed with high
mortgage securities. The risk of the companies was high and leverages in similar type of funds.
Moreover, liquidity in the market influenced the market players to invest in the similar type of
security in order to enhance maximum profitability within the economy. Following the market
trends resulted in creating a huge vacuum through investing in the similar assets without
effective base. Increasing CDOs by the banks was developed without an effective foundation
which resulted in defaults in mortgage payment. Lehman bank whose earnings were widely
based on the repayment and liquidity in the market collapsed widely creating a huge setback for
the financial market (The "Dumbness of Crowds", 2007). The associated firms gradually
collapsed creating high financial crisis leading to a long term financial recession. This trend
which was followed due to social tends developed an effective impact on the whole market
across the globe.
Theme 5: Following the crowd highly influenced investment decisions
According to Lorenz and et.al., (2011) investment decisions are made by people,
companies and investment managers on the basis of fundamental analysis, technical analysis and
gut feeling. These decisions are made with the sole purpose of the making high amount of
17
Illustration 5: Subprime crisis
(Source:The "Dumbness of Crowds". 2007)

returns on investment. As per the research with increasing trends of mutual funds and hedge
securities investors with low availability of funds are also seeking effective options in investing
in order to earn high returns on investment. Market trends and social influence are some of the
most common and widely used measures by investors around the world. In order to make the
effective and well managed investment decisions the investors or financial advisor must adopt
effective techniques for analysing market and fundamental trends and suggest the investor
accordingly. However as per the studies and market analysis following crowd is one of the major
factors which influences the investors in investing funds in selected securities or funds. The
average opinions and market analysis helps them in making effective and well managed
decisions. The case analysis of sub-prime crisis depicted the similar following on every aspect of
investment.
The market evidence represents an effective fact that the market is unable predict the
price changes within the market however investors demand a well defined knowledge about the
changing market conditions and its impact on the stock prices within the economy. Studies have
represented the fact that people respond immediate to any new evidence or news within the
market (Investment Philosophy, 2016). This develops effective studies and analysis of the
market. According to Zesch and Gurevych, (2010) market prices are often predicted within the
18
Illustration 6: Investment Philosophy
(Source: Investment Philosophy. 2016)

market but those are for a short span of time. Predictions within the market for a longer time
frame not interpreted efficiently by the advisor of investors as well. However, the financial crisis
of 2008 provide an effective example of how social influence may results in developing market
crisis over assets.
Theme 6: Following crowds in economic bubble resulted in more profit
Here, it can be assessed that following crowds at the time of economic bubble results into
more profits for people. Economic bubble is the situation in which market is at its heights and
thus it is essential for investors to possess effective knowledge regarding the exit from the
market can provide them high benefits. While, if the investors does not possess right information
and knowledge regarding the market and thus they keep the securities for long time and do not
quit at the right time then the market clashes at a certain point of time. However, at the time of
crisis (Ashby and Yampolskiy, 2011). In 2008 the housing bubble burst after reaching a certain
point and created vacuum within the economy that resulted into the crisis. However, the prices
dropped rapidly and the homeowners were not able to refinance their mortgages. Thus, it results
into enhancing the defaults in payments and market declines rapidly. Therefore, it is essential for
investors to have effective market knowledge or take opinion from experts regarding purchasing
and selling of securities. Through gaining best knowledge regarding exit from the market at a
particular point of time helps investors to earn high profits, while, at the same time if they
sustained in the market for long term then the market will definitely clash and thus investors will
incurs losses (Chen, Hu and Hwang, 2014).
At the time of 2008, there were high demand of home buyers and thus they took huge
amount of loan from market that results into crisis within the market. However, the loan takers
were not able to refinance their mortgages and thus became default that results into crisis.
Investors here played a risky game in regard to earn high profits they buy unaffordable houses by
gaining mortgages. Later, they were not able to pay the loan amount and announced themselves
bankrupt. Thus, such situation arises because home-buyers kept the securities for long term as
they don't possess required knowledge of taking exit from the market at the right time so that
they do not face risk situation. Further, they waited for long time in the market in order to
refinance their loan amount at a lower rate and make high profits.
Theme 7: Following the majority in crashes was foolish
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It can be evaluated from the study that following others at the time of crashes was foolish
and wrongful act because market was loaded with heavy investments. Thus, it was not ready to
bear such huge amount and thus the economic bubble resulted in market crashes. For instance,
people invested in huge amount because of the fact that they were aiming to gain high profits and
thus their expectations declines (Lorenz and et.al., 2011). It was not the correct decisions because
people invested by seeing each other invested which was a social factor and thus market results
into crashes. However, it is essential for an investor to remain neutral, defined objective and
disciplined. Also, they need to make rationale decision, unemotional investment decision so that
they can make better investigate profits. For instance, if individual is socially influenced and thus
takes chances to invest and get quick returns will not be able to reach their financial objectives. It
is essential for investors to forecast and then make investment decisions so that effective results
can be attained.
Further, it is essential for investors to take risk in order to attain high returns. But for that
they should be able to predict the market conditions because following crowd can be dangerous
and foolish. Here, it has been assessed that the market fall after the Lehman Brother collapses
and thus it is also because people blindly invested in market without judging the financial
conditions of market. Also, at the time of making investment decisions it is not essential for
investor to follow majority and invest in the securities which is giving high returns from past
several years. It is significant for individual to assess the financial market effectively before
making any financial decision and thus they are able to get high returns.
The end of Lehman Brothers raised because of downfall of the market and thus bank
become financially weak. Because it has given credits to the person who declared themselves
bankrupt and thus were not able to repay the loan amount in that case Lehman Brothers were
wiped out from market. After, their collapse from market the whole US market falls.
Theme 8: Expert opinion is a good option for investment decisions
Here, it can be stated that investors are required to undertake Delphi technique in which
they were required to take expert i\opinions before investing into the market or making
investment decisions. Delphi technique is a structured communication method that helps in
developing a systematic, interactive and forecasting method that relies upon the panel of experts
and assess their opinion in order to make investment decisions. On the other hand, if people does
not rely on the expert opinion who understand the market effectively and blindfold invest in the
20

market then at certain point of time, market will crash and it results into significant losses. It is
also used by individuals in order to overcome the problems and thus make good opinion in
regard to make investments (Yampolskiy and El-Barkouky, 2011).
Delphi is also considered as an expert judgement method in which a kind of group
discussion is done with the aim to reach a decision. Here, the procedure is developed that focuses
on a specific subject by using experts opinion, experience and knowledge so that best investment
decision can be made. However, at the time of investing money, people should not follow social
influence and become foolish. However, Delphi technique is time consuming but investors aims
to select such method as it helps them to invest effectively and efficiently through earning good
returns. Hence, Delphi technique is the best option that helps in taking corrective action and thus
make better investment decisions. As investing decisions should not be taken through social
influence because there is always a risk of market failure. Therefore, it is essential for investor to
determine the expert opinion and thus identify the potential of investment and possible risks
within it so that best results can be attained.
Also, individual is looking for an specialized opinion before making an investment
decision in order to determine the difficulty at the time of gaining return. However, a layman is
not able to identify the available risks within the investment therefore, it is essential for them to
take the opinion of experts in order to attain profits. Also, if an investor seems to be
overconfidence regarding the investment decision and they do not have sufficient knowledge
regarding the market conditions, market downfall etc. at that time choosing expert option is the
best that helps in solving queries regarding investing in particular market or not.
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CHAPTER 5: FINAL DISCUSSION
Introduction
This part of the study focuses on analysing the overall facts and findings of the research
in order to create an effective and well developed results for the analysis. This will help in
developing a clear understanding of the topic and will seek the gap between literature and actual
findings. The research aim for the present study was to analyse the impact of wisdom of crowds
in financial markets. This section will analyse the overall secondary research finding and will
create and effective understanding against the set research objectives. The appropriate
recommendation are given for the present study.
Conclusion and discussion
The above research has been carried out on a well developed measures. An effective
research analysis and well developed research findings helps in effectively linking financial
analysis with social influence in the economy. The research findings of the above study
developed a clear ad well defined understanding about financial market and the concept of
wisdom of crowds. The use of secondary data analysis helped in developing an in-depth and
clear understanding about the topic and issues related with the same. The case analysis of sub-
prime crises developed an effective base for understanding the trading practices in financial
markets and its impact on investors decisions and profitability as well. Moreover, the report
developed a well based understanding about how following the crowd creates an ineffective
impact on the expected returns and earnings of the individual.
The findings from the above study effectively represented the case analysis of sub-prime
crises which took place in the year 2008 and left the European and American market with wide
amount of lessons and learnings. The investors of the market consisted of well developed
banking firms and investment companies. The collapse in the market in the year 2008 spread a
shock-wave in the whole economy resulting in creating a crisis within the whole market. This
created a huge impact on the overall economic growth and development. Economic recession
succeeded the event creating wide employment cuts and exploding inflation within the economy.
The research findings analysed that the investors focused comparatively low on the risk
and return relationship. The investment portfolio of the companies consisted of the major
coverage of the mortgage securities which were highly in demand within the market. As per the
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finding the high liquidity within the market influenced the firms in developing an effective
impact on the growth of these portfolios. Moreover, the investors were highly interested in
earning huge returns on investment in a short span of time. This was effective and well
developed measure for the investors. The economy outgrew following the social influence highly
and developed an effective impact on the growth and development of the market. The mortgage
securities however consisted of the additional risk which resulted in collapsing market in
considerable time span. The bankruptcy of Lehman brothers was one of the most effective and
crucial example for the same. Moreover, the default mortgage payments created a wide vacuum
within the economy restricting the growth aspects of the segment. The given case clearly
represents the application of wisdom of crowds within the investment decisions by every level of
investor which resulted in creating an undesired impact on the economy.
The study developed an effective understanding about the concept of wisdom of crowds
which focuses on attaining a collective opinion of group rather than individual and expert
opinion. The started practice is effective and widely practised within the market regarding the
crucial and significant issues however in financial market the findings helped in analysing that
prediction is not very obvious. The social influence often results in misguiding the market
creating an ineffective impact on market returns. Many well established firms collapsed in the
recent crisis of the market economy. Social influence creates market trend within the economy
which is often developed through market analysis and behavioural trends collectively. Relying
on the collective opinion often results in misguiding in investor from the real market situations
and creates a wide impact on investment decisions.
The events and crashes and bubbles demand an effective analysis of the market
conditions and its impact on the growth and development of business as well. The success of the
investors following wisdom of crowds depends on various elements which can directly influence
the decisions. Factors such as Diversity of opinions, Independence, Decentralization and
Aggregation are considered as important element which play significant role in developing a
wise crowd. The investor's decisions can be efficiently influenced if the collective opinion is
taken from the wide crowd of the market this will help in developing positive impact on the
growth prospects of the firms. The research also represented that following crowd during bubbles
helps in gaining positive results but these decisions are in effective if the crowd factors such as
diversity or efficiency is not efficient.
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Hence, form the above study it can be clearly understood that wisdom of crowd is one of
he significant and most crucial concept adopted by market in order to effectively analyse the
trends and profitability measures. These helps in creating reliable market speculation which are
significant for the growth and development of businesses. Wisdom of crowd is not beneficial for
every situation because inaccurate collective opinion about bubbles and crashes can creates a
situation of eventually financial losses of investors.
It can be suggested that it is essential for investors to take decision by considering the
Delphi technique as it helps them to provide best decisions regarding the market situation. Also,
it is beneficial to investors to look upon the market situation and then invest in the securities so
that long term benefits can be attained. On the other side, if investors does not take look upon the
market potential and blindly invest into the securities then they might not give them long turn
return. Therefore, investors are recommended to exit the market at the right time by consulting
the experts so that desired goals can be attained. For instance, remaining in the market for long
term might be riskier therefore, it is essential for investors to have required knowledge so that
profits can be attained. Furthermore, it has been assessed that collective opinion always provides
past performance of market and thus it never provides prediction of future market conditions.
Therefore, it is the main reason why market fails. Therefore, it is essential for investors to gain
the knowledge of market situations so that they can provide long term benefits.
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