behavioral finance


A theory stating that there are important psychological and behavioral variables involved in investing in the stock market that provide opportunities for smart investors to profit. For example, when a certain stock or sector becomes "hot" and prices increase substantially without a change in the company's fundamentals, behavioral finance theorists would attribute this to mass psychology. They therefore might short the stock in the long term, believing that eventually the psychological bubble will burst and they will profit.

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You need to make sure that you understand how behavioral finance works and try to use it in your best interests.

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With all the hype around technology stocks, the investors felt uncertain about the promise of their mutual fund and decided to consult a behavioral finance analyst.

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Behavioral finance, an offshoot of behavioral psychology, looks at at the economic decision making process of investors including engrained thought patterns and behavioral biases, and its impact upon the performance of securities and markets.

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