behavioral finance

The study of behavior in market economies and businesses. Behavioral finance models focus on observed psychological factors that influence decision making during periods of economic uncertainty. For example, if a stock becomes highly sought after and its price rises sharply even though the company’s fundamentals haven’t changed, crowd psychology may be at work, according to behavioral finance psychologists. Another example of behavioral finance is when an investor is influenced to hold onto a stock that has decreased substantially because the investor wants to avoid admitting that he or she was wrong.