What is Behavioral Finance?
Behavioral finance is said to be a field of finance that proposes psychology-based theories to explain stock market anomalies. Within behavioral finance, it is assumed that the information structure and the characteristics of market participants systematically influence individuals’ investment decisions as well as market outcomes.
There have been many studies that have documented long-term historical phenomena in securities markets that contradict the efficient market hypothesis and cannot be captured plausibly in models based on perfect investor rationality. Investors rationality is determined by several demographic, economic, and cognitive factors. One of the examples could be Market Sentiments. Market sentiment is a major force driving the momentum in stock prices in securities markets. Similar anomalies could be overconfidence, heuristics, opportunism, turn of the day/time effects, etc. Behavioral finance attempts to fill the void and explore the relationship among these factors.
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