What does "behavioral finance" study?

Behavioral finance studies the psychological influences on investors' and analysts' decisions, emphasizing how emotions and cognitive biases can affect financial decision-making. This field examines phenomena such as overconfidence, loss aversion, herd behavior, and sentiment, providing insights into why individuals might not always act rationally in financial markets.

Understanding these psychological factors allows finance professionals to better comprehend market trends and the dynamics of investor behavior, going beyond traditional financial theories which often assume that individuals act rationally and purely in their financial best interests. This nuanced perspective helps in predicting market movements and improving investment strategies by acknowledging the human element in finance.