What does behavioral finance study?

Behavioral finance is a field that examines how psychological factors affect the decision-making processes of investors and financial markets. It explores the cognitive biases, emotions, and social influences that can lead investors to make irrational or suboptimal financial choices. This area of study recognizes that traditional financial theories often assume rational behavior, but real-life investor behavior can be affected by various psychological influences, such as overconfidence, loss aversion, and herd behavior.

By focusing on these psychological aspects, behavioral finance helps to explain anomalies in financial markets that cannot be accounted for by classical finance theories. Understanding these influences allows for a more realistic model of how markets operate and how individuals make investment decisions, which is particularly important for improving investment strategies and market predictions.