What does behavioral finance study?

Behavioral finance is a field that examines how psychological factors influence the financial behaviors and decision-making processes of investors. It studies the various biases and emotional responses that can affect investment choices, such as overconfidence, loss aversion, and herd behavior. By understanding these psychological influences, behavioral finance aims to highlight why investors may not always act rationally as traditional financial theories would suggest.

The focus on psychological factors is crucial because it provides a deeper insight into market anomalies and investor behaviors that deviate from classical economic theories. This perspective is essential for understanding how emotions such as fear and greed can lead to market trends that are not entirely based on objective financial data. Thus, the impact of psychological factors on investor behavior is central to the principles of behavioral finance, making the selected answer accurate and relevant to the study of this field.