Behavioral Finance: A Better way to Understand Financial Market

Can we think of the stock market as a person? It has moods, it can be ornery or lively, and it can overreact one day and under react on next day, and so on. There is growing field of Behavioral finance which involves study of moods of market. It assumes that investors are not as rational as traditional theory has assumed, but their psychology and biases in their decision-making impact stock prices. Behavioral finance studies psychological theory with conventional eco- nomics and finance and provides explanations about why people make irrational financial decisions. At times people behave irrationally and their behavior could not be understood by traditional theries of CAPM and EMH. While these theories could explain certain "idealized" events. The fact is people frequently behave irrationally. These anomalies prompted academics to look to cognitive psychology to account for the irrational and illogical behaviors that modern finance had failed to explain.