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Behavioral Finance

            The modern finance theory began with the notion of "efficient markets " with the introduction of the Modern Portfolio Theory and the Capital Asset Pricing Model. However, as years and decades passed, researchers noticed irregularities in the mainstream efficient market theory. According to Byrne and Utkus from the Vanguard group, behavioral finance studies the psychology of decision-making. It attempts to explain this irregularities or anomalies in a way that not all investors act rationally. According to Charles P. Jones in Investments Analysis and Management, behavioral finance explains that investors' emotions and biases affect stock prices and the market. This type of study incorporates the cognitive psychology, which refers to how people think. The field of behavioral finance has evolved in a way that it attempts to better understand and explain how sentiments and cognitive mistakes influence investors in the decision-making process.
             There are many aspects that cause investors to make errors while making an investment decision. Investors make judgments and form beliefs under uncertainty, which points to overconfidence or over optimism, and fear of regret. "Psychological research has established that men are more prone to overconfidence than women (especially in male-dominated areas such as finance), whilst theoretical models predict that overconfident investors trade excessively " (Sewell, 2007). According to Dr. Kishore of the University of Western Sydney, investors are overestimate their abilities and are overconfident over good things happening in the future than bad things. Also, he mentioned that human beings have the predisposition to feel the fear of regret if they make an error. Therefore, to avoid the pain of regret, people tend to change their behavior, which may end up being irrational at times. Human heuristics is another concept present in the irrational judgment of investors.


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