Behavioral finance challenges the idea that investors are rational. It studies how psychological biases — fear, greed, overconfidence, herd mentality — cause people to make systematically irrational financial decisions, creating predictable market patterns and bubbles.
Common biases: loss aversion (losses hurt twice as much as gains feel good), anchoring (fixating on irrelevant reference points), herd behavior (following the crowd), and confirmation bias (seeking only information that supports existing beliefs). These explain stock market bubbles, panic selling, and why people hold losing stocks too long.
Daniel Kahneman won the Nobel Prize in Economics (2002) for his work on behavioral economics. Richard Thaler won in 2017 for showing how "nudges" can improve financial decisions. Their work transformed finance — proving that markets are not always efficient and that human psychology creates exploitable patterns.