Behavioral finance seeks to understand how reasoning errors affect investor decision-making and market prices. Behavioral finance links the fields of psychology and finance together to investigate what psychological influences affect financial decisions, and studies market participants’ emotions and how they may influence market inefficiencies. Market psychology includes investor biases and mental models. A bias is a preconceived inclination or prejudice in favor of a particular viewpoint. Investor biases may result from a number of mental models. Mental models are ingrained ways of thinking that shape how individuals understand the world.
The Psychology Handbook discusses behavioral finance and the investor biases that influence decision making in the markets.