Year 3 · Applied Finance · Behavioral Finance
Behavioral Finance
Understand how cognitive biases, emotions, social behavior and market structure influence investor decisions, asset prices, anomalies and portfolio outcomes.
LEARNING OBJECTIVES
What you should be able to explain after this lesson
01
Explain why real investor behavior can differ from fully rational models.
02
Recognize major cognitive and emotional biases in investment decisions.
03
Use prospect theory to understand asymmetric reactions to gains and losses.
04
Analyze overconfidence, anchoring, confirmation bias, recency and disposition effects.
05
Understand herding, narratives, feedback loops and market sentiment.
06
Connect behavioral biases to market anomalies while recognizing limits to arbitrage.
07
Build a repeatable investment process designed to reduce behavioral errors.
CONCEPT MAPFrom human bias to better investment process
Investors are not perfectly rational — and markets do not instantly eliminate every mistake
CORE FACTS · SAME IN EVERY MODE
Traditional finance often assumes rational agents, consistent preferences and efficient use of information.
Behavioral finance studies systematic departures from those assumptions.
Biases matter most when they are persistent, shared by many investors and difficult to arbitrage away.
Behavioral explanations should complement, not automatically replace, risk-based explanations.
BeginnerTeaching style changes, knowledge does not.
People do not always make investment decisions like perfect calculators. Fear, greed, shortcuts and stories can influence how they react to information.
PROFESSIONAL VOCABULARYHeuristic / heuristic Behavioral bias / biais comportemental
Mental shortcut used to make decisions quickly under uncertainty.
Systematic tendency to make decisions that depart from fully rational benchmarks.