What is Behavioral Finance?
Behavioral finance is a field of study that combines psychology and economics to understand and explain financial decision-making and behavior. It is based on the idea that people's financial decisions are not always rational and can be influenced by a variety of psychological, emotional, and social factors.
Behavioral finance seeks to understand how these psychological, emotional, and social factors influence financial decision-making and how they can lead to departures from the assumptions of traditional finance theory, such as the efficient market hypothesis. Some of the key concepts in behavioral finance include heuristics, biases, framing effects, and prospect theory.
Heuristics are mental shortcuts that people use to make decisions quickly and efficiently. Biases are systematic errors in judgment that can lead people to make decisions that deviate from the norms of rationality. Framing effects refer to the way in which people's decisions can be influenced by the way in which information is presented to them. Prospect theory is a decision-making theory that explains how people evaluate and choose between different options, particularly when those options involve risk.
Behavioral finance has implications for a wide range of topics, including asset pricing, investment management, and corporate finance. It is an active area of research and continues to evolve as new insights into financial decision-making are gained.