Which of the following is a reason why people may not follow the rational rule for investors?

• A. They are unaffected by market trends or social influences.
• B. They consistently maximize their expected returns without bias.
• C. They always have perfect information about all investments.
• D. They may be influenced by emotions such as fear or greed.

Answer: (D)

Verified step by step guidance

1. Understand the rational rule for investors: it states that investors should make decisions to maximize their expected returns based on available information, acting logically and without bias.
2. Recognize that the rational rule assumes investors have perfect information, are unaffected by emotions, and are not influenced by external factors like market trends or social pressures.
3. Identify that in reality, investors often face limitations such as imperfect information, cognitive biases, and emotional influences like fear or greed.
4. Analyze how emotions such as fear or greed can lead investors to deviate from purely rational decision-making, causing them to buy or sell assets irrationally.
5. Conclude that the presence of emotional influences is a key reason why people may not follow the rational rule for investors, unlike the other options which describe idealized or unrealistic conditions.