1. Behavioral Finance: Introduction
  2. Behavioral Finance: Background
  3. Behavioral Finance: Anomalies
  4. Behavioral Finance: Key Concepts - Anchoring
  5. Behavioral Finance: Key Concepts - Mental Accounting
  6. Behavioral Finance: Key Concepts - Confirmation and Hindsight Bias
  7. Behavioral Finance: Key Concepts - Gambler's Fallacy
  8. Behavioral Finance: Key Concepts - Herd Behavior
  9. Behavioral Finance: Key Concepts - Overconfidence
  10. Behavioral Finance: Key Concepts - Overreaction and Availability Bias
  11. Behavioral Finance: Key Concepts - Prospect Theory
  12. Behavioral Finance: Conclusion

By Nathan Reiff

One of the primary conventions of financial theory holds that participants in an economy are essentially rational “wealth maximizers,” meaning that they will make decisions based on the information around them and in a way that is as reasonable as possible. However, in actuality there are countless instances in which emotion and psychology have undue influence upon our decisions, and the result is that “rational” actors can display unpredictable or irrational behaviors.

The branch of economics which is concerned with this paradox is called behavioral finance. This relatively new field seeks to combine behavioral and cognitive psychological theory with conventional economic theory in order to propose explanations as to why people might make irrational financial decisions.

Over the course of this tutorial, we will explain some of the anomalies (i.e., irregularities) which exist in the real world but for which conventional financial theories have not accounted. Additionally, we will aim to provide some insight into a few of the underlying biases and motivators which may cause certain individuals to exhibit irrational behaviors. We’ll also explore how some actors in a financial ecosystem have been able to capitalize on these irrational behaviors. Hopefully, in reading this tutorial, you will be able to better protect yourself against acting against your best interests when it comes to financial matters.

(For related reading, see Taking A Chance Of Behavioral Finance and Leading Indicators Of Behavioral Finance.)


Behavioral Finance: Background
Related Articles
  1. Investing

    Don't Let Emotions Derail Investment Decisions

    Understanding behavioral finance can help you make better investing decisions.
  2. Financial Advisor

    A Quick Guide On Behavioral Funds

    Investopedia explores the working of behavioral funds, their benefits and risks, and an analysis of their past returns.
  3. Investing

    An Introduction to Behavioral Finance

    Curious about how emotions and biases affect the market? Find some useful insight here.
  4. Investing

    The Behavior That Helps You Increase Your Returns

    Has your financial advisor talked to you about the factor that makes or breaks financial success?
  5. Financial Advisor

    8 Common Biases That Impact Investment Decisions

    Behavioral biases hit us all as investors and can vary depending upon our investor personality type.
  6. Investing

    4 Behavioral Biases And How To Avoid Them

    Here are four common common behavioral biases for traders and how to minimize their effects on your portoflio.
  7. Personal Finance

    7 Courses Finance Students Should Take

    These are the top seven college classes will help you prepare for the working world of finance. Take these finance courses to stand out from your peers.
  8. Insights

    4 Reasons Why Irrational Exuberance Lasts

    20 years ago, Alan Greenspan gave his famous "irrational exuberance" speech, but asset bubbles take a long time to pop.
Trading Center