Behavioral finance is a field that examines how psychological influences affect financial decision-making. Unlike traditional finance, which assumes that investors act rationally and markets are efficient, behavioural finance suggests that emotions, cognitive errors, and social factors can drive irrational behaviour. These biases can lead to mispriced assets, speculative bubbles, and other market anomalies. Market anomalies challenge the notion that stock prices always reflect all available information. If investors were entirely rational, market prices would adjust swiftly and efficiently to new data. Understanding these biases and inefficiencies can help investors make more informed decisions and potentially capitalize on mispricings in the market.

The Psychology Behind Investor Biases

Investors do not always act logically when making financial decisions. Psychological biases influence their perceptions, leading to suboptimal choices that impact their portfolios. These biases can be broadly categorized into cognitive and emotional biases.

Cognitive biases arise from flawed reasoning and errors in information … More >>>