Irrational traders know the fundamental value of a security, but rather than basing their trading decisions on this, they base it on their expectations of how other market participants will behave. Here we discuss experimental evidence demonstrating this irrational behaviour. We consider bubbles and IPOs as real life examples.
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We have classified market participants into five types. In this post we describe the irrational investors or traders in more detail. As explained before, the irrational traders are the market participants who are informed, but still transact although they understand that they are buying securities above fair value or are selling securities below fair value. Even so, they believe that their strategy will lead to outperformance.
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