What effect can high inflation have on investor behavior?

High inflation tends to create an uncertain economic environment, leading many investors to become increasingly risk-averse. When inflation is high, the purchasing power of money decreases, which can erode the real returns on investments. This can cause investors to feel more cautious, as they may worry about the potential for losses on their investments.

Investors often seek to preserve their capital during periods of high inflation, prioritizing safer assets rather than those that carry higher risk and potential volatility. This shift in behavior manifests as a reluctance to invest in equities or assets that might not keep pace with inflation, favoring instead low-risk investments or holding cash to avoid potential losses.

The other options imply behavior that is not typically associated with high inflation. Increased investment in low-risk assets reflects a cautious approach, while a greater willingness to take on debt and higher confidence in long-term investments suggest a more optimistic outlook that generally doesn't align with the negative impacts that high inflation tends to have on investor sentiment.