Behavioral and Economic Theory

Behavioral finance combines insights from psychology and economics to understand how people make financial decisions. Unlike traditional economic theories, which assume people are always rational and make choices purely based on logic, behavioral finance acknowledges that emotions, cognitive biases, and social influences can significantly impact decision-making. For example, investors might hold onto losing stocks due to fear of loss or follow trends due to social pressures. This approach helps explain why markets can behave unpredictably and why individuals might not always act in their best financial interest.