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Behavioral Finance Definition and Quiz

The frequency of market bubbles, panics and crashes exceeds what we predict statistically. Most market participants are human after all.
  1. Define - Define Behavioral Finance.
  2. Context - Use Behavioral Finance in a sentence.
  3. Quiz - Test yourself.
face pic by Paul Alan Davis, CFA
Updated: February 16, 2021
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Behavioral Finance definition for investments


Behavioral finance is the study of human psychology as it relates to financial decision-making. Many findings from the study of behavioral finance indicate that investors do not behave rationally. Rational behavior is a key assumption of Modern Portfolio Theory (MPT) and the Efficient Market Hypothesis (EMH).

Synonym: behavioural finance

For context, a whole academic field of study involves biases in human behavior that lead to unwise investment decision-making. For example, investors tend to hold on to their losing positions and are more inclined to sell winners. They also suffer from overconfidence and underreaction to positive news in the near term.

In a Sentence

Zoe:  Should I use the American spelling of Behavioral Finance or the British one?
Kay:  Only 36% of Americans have passports. Know your audience. Go with behavioural.


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Which noted scholar in behavioral finance explained synthetic CDOs with Selena Gomez in a cameo for the film The Big Short (2015)? | Daniel Kahneman, Robert Shiller or Richard Thaler?

Richard Thaler.

Which investment philosophy is likely least impacted by emotional decision-making? | Fundamental, Passive, Quantitative or Technical?


Learn More About The Glossary

Still unclear on Behavioral Finance? Learn how to build a structured investment process with our Quant 101 Series of tutorials.

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behavioral finance
investor psychology
behavioural finance
irrational investor
stock movements
emotional investing
modern portfolio theory
efficient market hypothesis
momentum investing
trading behavior
market behavior
loss aversion

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