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What Is Behavioral Finance?

by John Nofsinger

University of Alaska, Anchorage, finance professor John Nofsinger has planned academic curricula, composed articles, and conducted business presentations on the psychology of investing, also known as behavioral finance. Additionally, John Nofsinger has blogged on this subject, among others, for the online platform of the magazine Psychology Today. The subject of behavioral finance is a relatively new topic of study that provides an alternative way to interpret stock market fluctuations.
The subject of behavioral finance is designed to study the effects that emotional, social, and psychological factors have on the evaluation of economic decisions. Behavioral finance is at odds with traditional finance, or modern portfolio theory, which assumes that investors are rational and make unbiased, risk-averse decisions that benefit them personally based on accurate and complete sets of available information.
Behavioral finance also offers explanations for why some stocks trade at prices that are considerably higher or lower than their true value. Common behavioral practices that can negatively affect investment decisions include overconfidence, fear of regret, and the illusion of knowledge.                            
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