Behavioral finance, at its core, acknowledges that individuals often deviate from purely rational decision-making models when managing finances or making investment choices. It posits that psychological biases, emotional influences, and cognitive limitations significantly impact financial behaviors, leading to decisions that may not always maximize expected utility or align with traditional economic assumptions. These influences can manifest as tendencies toward overconfidence, loss aversion, herding behavior, or framing effects, all of which can predictably skew financial judgments.
The incorporation of psychological insights into financial analysis allows for a more nuanced understanding of market dynamics. Recognizing these predictable biases provides opportunities to improve investment strategies, mitigate risk, and develop more effective financial products and services. Historically, standard finance models assumed perfect rationality among economic actors. Behavioral finance challenges this assumption, offering a more realistic depiction of how people actually behave in financial contexts, leading to advancements in areas like portfolio management, risk assessment, and financial planning.
