Behavioral Finance

For decades, the field of finance was dominated by the elegant, rational models of traditional economics, which assumed that investors were perfectly logical “homo economicus”—cool, calculating, and self-interested utility maximizers. Markets, in turn, were assumed to be efficient, instantly incorporating all available information into prices. Yet, practitioners and observers consistently witnessed phenomena that these models could not explain: dramatic bubbles and crashes, the persistence of seemingly irrational investment choices, and the chronic underperformance of the average investor. Enter Behavioral Finance.