Behavioral finance explores how human psychology impacts financial decisionmaking from "summary" of How Finance Works by Mihir Desai
Behavioral finance delves into the fascinating intersection of human psychology and financial decision-making. It seeks to understand why people sometimes make irrational choices when it comes to managing their money. By studying how emotions, biases, and cognitive errors influence individuals' financial behaviors, researchers in this field gain valuable insights into the complexities of the human mind. One key concept in behavioral finance is that of heuristics, or mental shortcuts that people use to simplify decision-making. These shortcuts can lead to systematic errors in judgment, as individuals may rely on rules of thumb rather than rational analysis. For example, the availability heuristic causes people to overestimate the likelihood of events that are easily recalled, leading them to make biased investment decisions based on recent news or personal experiences....
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