Rational investors invest in projects that they will gain profits from. Before a rational investor invests in a project, they are usually aware of the investment price, but the benefits of the investments are usually uncertain. They might have expectations of the benefits of investing in the project but are never sure of the unforeseen events that might happen in the future, thus affecting their investment returns (John & Cassidy, 2013). This uncertainty might even affect the investors’ decisions, especially when there’s high levels of uncertainty. Keynes states that increased uncertainty may affect individual ability to make investment decisions, thus negatively affecting investment expenditure (Crotty, 2011). Rational investors only invest in projects with high benefits to their firms, and when there’s an increased risk of uncertainty, rational investors will not invest in the project. They choose to utilize profits by considering the returns, liquidity of assets and transactional cost of the project before they invest. Uncertainty in investment occurs when the project’s revenue is not secure such that an investor might lose their investment; a rational investor will choose to forgo investing in the project (Crotty, 2011). In cases where the benefits of investing in the future outweigh the benefits of investing now, a rational investor will choose to wait and invest in the future.
People make financial decisions based on their personal life experiences with money. They might decide to make financial decisions based on their experiences with money and what they think is the best investment to make. Based on their experiences, individuals develop content knowledge and competencies in making financial investments. Based on the current trend in the business, people might be persuaded to invest in different sectors such as real estate. They tend to make financial decisions based on their emotions and what they feel is the best investment instead of doing a critical analysis of the financial market. Not understanding the project before making an investment is among the ways that people make a bad investment. Unlike rational investors who invest in a business that they understand and know the level of uncertainty, many people attempt to invest solely because they have an opportunity to make a profit without knowing the level of uncertainty involved. Before investing, individuals should thoroughly understand the project they are investing in and the benefits they stand to gain from the investment. This results in loss of investment as they did not make the right decisions when investing.
Ignoring warnings is another reason that investment fails. People often fail to heed the warning given about a financial investment falling in the future. When making financial decisions, they often fail to do the math and look for warning signs about the investment project (John & Cassidy, 2013). Being overconfident about an investment inhibits the individual from noticing warning signs of a project failing. Often when people invest, they do not thoroughly think about the investment decision and feel that they are making an intelligent decision. Doing thorough research on the investment project is crucial as it helps the individual foresee the warming signs and take action before these signs happen. Financial markets play a vital role in disturbing investment capital, and if they work correctly, they can help the economy prosper (John & Cassidy, 2013). Financial markets are influenced by what’s happening today, and when there’s relatively a long period of calmness, there are no substantial changes in the prices of investment. During this time, the prices do not vary much, and there are no irrational disturbances to investment. When there are unreasonable disturbances, the financial market is negatively affected, leading to disruption of assets. Also, when individuals invest in different markets, they help financial markets to develop by diversifying in various sectors.
In conclusion, financial knowledge is critical for making informed financial decisions that promote personal development. To make rational financial investments, investors first weigh the benefits of investing in the project against the risk of uncertainty. Rational investors only invest in projects with high benefits to their firms, and when there’s a high risk of uncertainty, rational investors will not invest in the project. They choose to utilize profits by considering the returns and transactional cost of the project before they invest.
References
Crotty, J. (2011). The realism of assumptions does matter: Why Keynes-Minsky theory must replace efficient market theory as the guide to financial regulation policy (No. 2011-05). Working Paper.
John, C., & Cassidy, J. (2013). How markets fail: The logic of economic calamities. Penguin UK.
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