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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.
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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