Behavioural finance

Behavioural finance is a subfield of behavioural economics. It argues that when people make financial decisions like investing, they are not nearly as rational as traditional finance theory predicts.

Mainstream theory make assumptions in its models that people are rational and free from emotion or the effects of culture and social relations. But behaviourists think that people make financial decisions based on emotions and cognitive biases.

An example of irrational behaviour:

Offer someone a choice of

1. a sure $50 or,
2. on the flip of a coin, the possibility of winning $100 or winning nothing.

Chances are people will choose the sure $50.

But offer a choice of

1. a sure ...