Behavioral Funds

DEFINITION of 'Behavioral Funds'

Behavioral funds are a category of mutual funds that use behavioral finance as a basis for their investment strategy. Managers of these funds, which are based on a relatively new approach, believe that human behavior leads to certain market inefficiencies that they can take advantage of to get a superior return.  

 

BREAKING DOWN 'Behavioral Funds'

During periods of market downturn, for instance, investors tend to have a herd mentality of shying away even from investments that are fundamentally sound, driving down their prices. These investors are driven more by their human emotions than by investment fundamentals.

For instance, during the U.S stock market downturn of 2007 through 2009, many emotion-influenced investors fled the stock market leading to bargain buys for the more savvy investors. The strategy of behavioral funds is to make use of such opportunities to buy stocks, and other investments that other investors avoid, at a discounted price. However, it is not clear whether behavioral funds using such strategies have actually outperformed the market.