Behavioral finance examines how psychological influences and biases affect the financial behaviors of investors and markets. Unlike traditional finance, which assumes rational decision-making, behavioral finance acknowledges that investors often act irrationally due to cognitive and emotional biases.
Key Cognitive Biases in Investing
Applying Behavioral Insights to Improve Investing
Summary Table
| Bias | What It Does | Impact on Investing | How to Counteract |
|---|---|---|---|
| Confirmation Bias | Seeks confirming info | Overconfidence, ignoring red flags | Actively seek disconfirming evidence |
| Herd Behavior | Follows the crowd | Bubble formation, irrational moves | Rely on research & valuation |
| Loss Aversion | Fears losses more than gains | Hold losers; sell winners too soon | Reframe losses as learning; focus on process |