Behavioral Finance
The study of how emotions and mental shortcuts influence money decisions.
What You Need to Know
Behavioral finance blends psychology and economics to explain why smart people often make irrational financial choices.
Key Biases:
- Loss aversion: losses hurt about twice as much as gains feel good
- Herding: following the crowd into fads or bubbles
- Overconfidence: believing we can time the market or pick winners
- Anchoring: clinging to the first number we hear
Knowing your biases helps you build safeguards like automation, diversification, and checklists.
Sources & References
This information is sourced from authoritative government and academic institutions:
- sec.gov
https://www.sec.gov/investor/pubs/assetallocation.htm
Related Calculators & Tools
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Related Terms in Personal Finance
20/4/10 Rule
A conservative car buying guideline: 20% down payment, 4-year maximum loan, monthly payment ≤10% of gross income.
50/30/20 Rule
A budgeting guideline allocating 50% to needs, 30% to wants, and 20% to savings
Analysis Paralysis
Overthinking choices until you miss the window to act.
Automated Savings
Setting up automatic transfers so saving happens without willpower.
Budget
A spending plan that tracks income and expenses to ensure you're living within your means and working toward financial goals.
Budget Planning
Process of creating a plan to spend your money on priorities, including fixed expenses like pet care.