Marginal Benefit vs. Marginal Cost

Generally, a crisis is caused if institutions or assets are overvalued, and can be worsened by panic and herd-like investor behaviour.

Contributing factors include systemic failures, unexpected or uncontrollable human behaviour, regulatory absence or failures, or contagions that is like a virus that spread from one institution or country to the next. If left unchecked, an economic crisis can cause a recession or depression.

• The Stock Crash of 1929. On Oct. 24, 1929, share prices collapsed after a period of wild speculation and borrowing to buy shares. It led to the Great Depression, which was felt worldwide. One trigger of the crash was a drastic oversupply of commodity crops, which led to a steep decline in prices.
• The 20007-2008 Global Financial Crisis. This was the worst economic disaster since the Stock Market Crash of 1929. It started with a subprime mortgage lending crisis in 2007. Then it moved into a global banking crisis with the failure of investment bank Lehman Brothers in September 2008.

A company's market value is a good indication of how investors perceive a business.

Market value is determined by the valuations or multiples accorded by investors to companies, including price-to-sales, price-to-earnings, enterprise value-to-EBITDA, etc. The higher the valuations, the bigger the market value.

• Market value is influenced by the business cycle and can fluctuate over periods of time. Market values decrease during recessions (bear markets) and rise during economic expansions (bull markets).
• Market value also depends on the sector in which the company operates, its profitability, debt load, and the broad market environment.
• Market value for a firm may be very different from book value or shareholders' equity. A stock will be considered undervalued if its market value is well below book value. It does not mean that a stock is overvalued if it is trading at a premium to book value - it again depends on the sector and the extent of the premium compared to the stock's peers.

The economic theory of expected utility maximization says that people will act out of rational self-interest. But psychologist Daniel Kahneman showed that it is incorrect.

• Common cognitive biases cause people to use faulty reasoning to make irrational decisions, such as the anchoring effect, the planning fallacy, and the illusion of control.
• People make decisions by using irrational guidelines such as perceived fairness and loss aversion, which are based on feelings, attitudes, and memories.
• People tend to use general rules, such as representativeness, to make judgments in contradiction to the laws of probability.

• In 2001, George A. Akerlof, A. Michael Spence, and Joseph E. Stiglitz won the prize "for their analyses of markets with asymmetric information."
• Economic models predicated on perfect information are often misguided. In reality, one party usually has superior knowledge, such as in the car market, where sellers know more than buyers about the quality of their vehicles and can lead to a market of lemons (adverse selection.)
• Better-informed market participants can transmit information to lesser-informed participants. Job applicants can use educational attainment as a signal to prospective employers about their likely productivity; corporations can signal their profitability to investors by issuing dividends.