What is the primary focus of behavioral finance?

Behavioral finance primarily focuses on understanding how psychological factors influence investor behavior and financial markets. This field integrates insights from psychology with financial theory to explain why investors might make irrational decisions, leading to market anomalies not predicted by traditional finance models. For instance, concepts like overconfidence, herd behavior, and loss aversion are central to behavioral finance, as they provide insight into why investors might not act in their best financial interest or why markets can deviate from expected rational behavior.

The emphasis on psychological influences helps to explain phenomena such as asset bubbles or market crashes that traditional financial theories struggle to account for. Thus, by studying these psychological aspects, behavioral finance seeks to better understand and predict market movements and individual investment decisions.