Financial Behavioral Theory

Financial Behavioral Theory explains how people's emotions, habits, and psychological biases influence their decisions about money and investing. Instead of assuming everyone makes purely rational choices, this theory recognizes that feelings like fear or greed, as well as habits and past experiences, often shape financial behavior. These influences can lead to common mistakes, like panic selling during a downturn or holding onto losing investments. Understanding these biases helps investors and financial advisors develop better strategies, promoting more thoughtful decision-making that considers both rational analysis and emotional factors.