Question

How does behavorial finance affect the stock market?

Answer 1

1. Behavioral finance is the study of the influence of the psychological factors on financial markets evolution.

2. Financial investors are people with a very varied number of deviations from rational behaviour, which is the reason why there is a variety of effects, which explain market anomalies. Behavioral finance paradigm suggests that investment decision is influenced in a large proportion by psychological and emotional factors.

3. Classical finance assumes that investors are rational and they are focused to select an efficient portfolio, which means including a combination of asset classes chosen in such a manner as to achieve the greatest possible returns over the long term, under the terms of a tolerable level of risk.

Based on the above points, Behavorial Finance affect the stock market.