Behavioral Finance

Behavioral finance is a subfield of behavioral economics that focuses on how psychological factors and biases affect financial decisions, including investing, spending, and risk management. It challenges the traditional finance theory, which assumes that markets and investors are always rational. Behavioral finance explores how cognitive biases like overconfidence, herd behavior, and anchoring can lead to irrational financial behaviors, such as speculative bubbles or market crashes.

Example

Herd behavior in financial markets, where investors follow the actions of others rather than relying on their own analysis, can lead to market bubbles or crashes.