(A) The reasoning that it is better to select what others select backfires
(B) The reasoning that one should select what others are likely to like, puts into action a sequence of similar reasoning which gathers momentum
(C) The reasoning that one should try to predict what the average prediction about a certain prediction is likely to be, is the best one
(D) The reasoning which is based on mass psychology about what would be the general prediction is optimal.
Ans: B
Solution:
The lines “A better strategy is to select those faces the other players are likely to fancy. This logic tends to snowball. After all, the other participants are likely to play the game with at least as keen a perception” clearly shows that the logic works on cumulative selections which keeps growing bigger and thus leads to the optimal outcomes. To snowball means to accumulate gradually into something big.
Q: 32. Which of the following best paraphrases the concept of castle-in-the-air theory of price Determination?
A) An investment is worth paying for if there is a fool waiting to buy that investment
B) It is irrational to buy something at a certain price if it is considered high by market standards
C) Whatever be the cost price of an investment, it is justified if one understands mass
Psychology
D) There is no upper limit to the price of an investment as long as there is a growing market for that investment
Ans: D
SOLUTION
The line “It’s perfectly all right to pay three times what something is worth as long as later on you can find some innocent to pay five times what it’s worth.” Indicates d as the answer.
Q: 33. According to Keynes
I. The study of the stock market is a short-term phenomenon
II. Stock market changes are amenable to long term predictions
III. Understanding stock markets require the application of psychology rather than finance
IV. The market value of an investment is always higher than its inherent value
(A) I and III
(B) II, III and IV
(C) I, II and III
(D) III and IV
Ans: A
Solution:
According to Keynes, the study of stock market is “not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public.” This proves (I) to be true and (II) to be false. “Keynes, in other words, applied psychological principles rather than financial evaluation to the study of the stock market.” Proves III to be true. In IV , the word “always” makes it a distortion of the truth.
Q: 34. Which of the following situations most closely follows the ―castle-in-the-air theory?
(A) A professional buying a second house hoping to sell it for a profit knowing that it is overpriced
(B) A gambler continuing to wager larger and larger sums in the hope of winning
(C) A promoter starting up a project in a remote area which reliable sources predict will take at least 20 odd years to become urbanized
(D) An investor buying up the stocks of a company which is set to secure a several big orders in the next few months
Ans: A
Solution:
The “Castle-in-the-air” theory says “An investment is worth a certain price to a buyer because she expects to sell it to someone else at a higher price. The investment, in other words, holds itself up by its own bootstraps. The new buyer in turn anticipates that future buyers will assign a still-higher value.” This logic is apt in the situation mentioned in option a . Clearly a second overpriced house is expected to fetch a higher price in the eyes of the buyer. Gambling is about chance and does not apply here. 20 years is a long term business and according to the passage the theory is mostly about short term predictions. Last option is based on financial evaluation which is not the basis of the referred theory.