Consider a scenario in which half of the business ideas on offer to a capital market are 'good' and the other half are 'bad.' Entrepreneurs with bad ideas claim that their ideas are as valuable as the good ones. In addition, investors cannot distinguish between a good idea and a bad idea and so value good ideas and bad ideas at an average level. Consequently, bad ideas are overvalued and good ideas are undervalued. The bad ideas begin to 'crowd out' the good ones because entrepreneurs with undervalued good ideas exit the capital market whilst entrepreneurs with overvalued bad ideas remain. Eventually, investors lose confidence in the market. What does this scenario describe?

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The scenario youve described aligns with several economic and financial conceptsHere are some possibilities 1 The Market for Lemons This theory develo... View the full answer