Behavioural finance explains how investors actually behave, instead of how they are supposed to. It recognises that investors sometimes act in their own economic interests, and sometimes do not.
Behavioural finance is a field of study that attempts to better understand and explain how emotions and cognitive errors influence investors and the decision-making process.
A key observation from behavioural finance is that investors often make decisions based on an approximate rule of thumb, rather than strict analysis. They are also not consistent with the decisions made.
Another observation is that there are explanations for market outcomes, that are contrary to expectations or market efficiency, which includes mispricing, non-rational decision-making and biases.
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