Behavioral finance
Principles of Finance glossary · Capital Budgeting
Definition
Subfield studying systematic deviations from rational investor behavior, including anchoring, herding, overconfidence, loss aversion, and mental accounting.
Behavioral finance in plain English
Classic economics assumes investors are cold, rational calculators, but real people aren't — we panic, follow the crowd, and cling to random numbers. Behavioral finance is the study of these predictable mental shortcuts and mistakes, like anchoring (fixating on the first price you saw), herding (buying just because everyone else is), overconfidence (thinking you're a better stock-picker than you are), loss aversion (a $100 loss stings more than a $100 gain feels good), and mental accounting (treating 'bonus money' as more spendable than paycheck money). It matters because these quirks move real markets and cause investors to lose money in ways a purely 'logical' theory can't explain. It's basically psychology meeting the stock market.
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