Behavioural finance

How psychological biases shape investor behaviour and financial markets Behavioural finance is the study of the influence of psychology on the behaviour of investors or financial analysts. It assumes that investors are not always rational, have limits to their self-control and are influenced by their own biases. For example, behavioural law and economics scholars studying the growth of financial firms' technological capabilities have attributed decision science to irrational consumer decisions. It also includes the subsequent effects on the markets. Behavioral Finance attempts to explain the reasoning patterns of investors and measures the influential power of these patterns on the investor's decision making. The central issue in behavioural finance is explaining why market participants make irrational systematic errors contrary to assumption of rational market participants. Such errors affect prices and returns, creating market inefficiencies. History Traditional finance The accepted theories of finance are referred to as traditional finance. The foundation of traditional finance is associated with the modern portfolio theory (MPT) and the efficient-market hypothesis (EMH). Modern