Behavioral Finance

Behavioral finance studies how psychological biases and emotions cause investors to make decisions that deviate from purely rational, self-interested behavior, and how those deviations show up in market prices. It challenges the assumption, central to classical finance theory, that investors always act rationally.

The field has documented dozens of recurring biases, from loss aversion to confirmation bias to overconfidence, that combine to explain patterns like bubbles, crashes, and momentum that pure rational-market models struggle to account for on their own.