Behavioral Asset Pricing Theory

Behavioral Asset Pricing Theory combines insights from psychology and finance to explain how human behavior affects asset prices. It suggests that investors do not always act rationally; they are influenced by emotions, biases, and social factors. This can lead to mispricing of assets in the market, causing prices to deviate from their fundamental values. Unlike traditional theories that assume rational behavior, Behavioral Asset Pricing acknowledges that irrational behaviors, such as overconfidence or panic selling, can significantly impact investment decisions and market trends, ultimately affecting the pricing of stocks and other financial assets.