Behavioural Finance
The study of how psychological factors cause investors and markets to depart from purely rational decision-making.
How it is identified
Test: the observed behaviour departs systematically from what expected-utility maximisation would predict, in a documented and repeatable direction
Unit
qualitative
In depth
Traditional finance assumes investors are rational and markets efficient; behavioural finance documents that they are neither, and does so with experimental and market evidence rather than assertion. Its practical value is not that it lets you predict others' mistakes but that it identifies your own, which is the only part you control. The biases it describes are systematic rather than random, which is why they persist rather than cancelling out across investors. Knowing a bias exists reduces it far less than most people expect, which is why rules and checklists work better than awareness alone.
Worked example
An investor holds a losing position for four years and sells a winner after six weeks. Both decisions felt reasoned at the time; together they are the disposition effect, which was documented across thousands of accounts long before this one.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Behavioural Finance” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.