What is the meaning of behavioral finance?

Behavioral finance is the study of how human behavior affects financial decisions. It looks at how people make decisions about investments, and how these decisions are influenced by psychological factors.

There are several key concepts in behavioral finance, including:

  • Heuristics
  • Prospect theory
  • Mental accounting
  • Overconfidence
  • Anchoring


Heuristics are cognitive shortcuts that people use to make decisions. These shortcuts are often based on experience or intuition, rather than reason.

Prospect theory

Prospect theory is a model of decision-making that takes into account the fact that people are not rational actors. It assumes that people make decisions based on how they expect an event to turn out, rather than on the actual probability of it happening.

Mental accounting

Mental accounting is the process of assigning different values to different items based on personal factors. For example, someone might be more likely to spend $100 on a new shirt if they perceive it as being worth $50, even though it costs $100.


Overconfidence is the belief that one knows more than one actually does. This can lead to bad decision-making, as people may take on too much risk or make poor investment choices.


Anchoring is the tendency to base decisions on past information, even if that information is no longer relevant. For example, someone might make a decision based on the price they paid for a stock, rather than on its current market value.

Each of these concepts helps to explain why people make financial decisions that they do, and how these decisions can lead to sub-optimal outcomes.

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Why is behavioral finance important?

Behavioral finance is important because it helps us to understand why people make the financial decisions they do. It can also help us to make better decisions ourselves.

By understanding the psychological factors that influence financial decisions, we can make more informed choices about our own money.

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We can help you with other finance-related subjects

If you need any kind of finance-related assistance, we can help. We offer assistance in a range of subjects, including:

  • 1

    Financial accounting

    It is the process of recording, classifying, and summarizing financial transactions to prepare financial statements.

  • 2

    Business finance

    It is the study of how businesses raise capital to fund their operations and activities.

  • 3

    Corporate finance

    It is the study of how corporations manage their finances, including how they raise capital, invest it, and use it to generate profits.

  • 4

    Real estate finance

    It is the study of how real estate is financed and managed.

  • 5

    Time value of money

    It is the principle that states that a dollar today is worth more than a dollar tomorrow. This is because you can invest the dollar today and earn interest on it.

  • 6

    Capital budgeting

    It is the process of deciding whether to invest in a long-term project or not.

  • 7

    International finance

    It is the study of how financial markets operate in different countries.

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