Behavioral finance explores how emotions influence investing decisions. Markets are not always rational.
## Common biases
– Herd behavior: following the crowd into bubbles and fti consulting invest crashes.
– Loss aversion: fear of losing outweighs potential gains.
– Overconfidence: assuming knowledge guarantees success.
## Examples in history
– Dot-com bubble: investors overvalued internet companies.
– 2008 financial crisis: herd behavior magnified housing market risks.
– Meme stocks like GameStop and AMC: driven by social media enthusiasm.
## How to manage psychology
– Avoid emotional trading.
– Diversify to reduce emotional stress during downturns.
– Use rules-based investing through ETFs and index funds.
**Conclusion**
Behavioral finance shows that investors are not perfectly rational. Understanding biases and emotions helps investors avoid mistakes, stay disciplined, and improve returns.
