Behavioral Finance: What Drives Our Financial Decision-Making?

Traditional finance assumes people make logical, rational money decisions. But in reality, emotions, life circumstances, and mental habits often lead us to act differently. That’s where behavioral finance comes in—it studies how psychology affects our financial choices.

People are influenced by cognitive biases—mental shortcuts that can cloud judgment. For example, overconfidence makes investors take on too much risk, while loss aversion means losses hurt more than gains feel good, causing people to hold losing investments too long or sell winners too soon.

Another common behavior is herding, where people follow the crowd, fueling market bubbles and crashes. Anchoring happens when we fixate on a specific number, like a past stock price, even when it’s no longer relevant. Emotions like fear and greed also play a big role in market ups and downs. Greed can lead to buying frenzies, while fear triggers panic selling.

Understanding these patterns helps investors avoid costly mistakes. It also helps advisors provide better guidance by considering how clients think and feel.

Ultimately, behavioral finance reminds us that managing money is as much about mindset as it is about math. By spotting and addressing our biases, we can make clearer, more disciplined choices that support our long-term financial goals.

This content is furnished for informational purposes only and is not investment advice, a solicitation, an offer to buy or sell, or a recommendation of any security to any person. Opinions, beliefs and/or thoughts are as of the date given and are subject to change without notice. The information presented was obtained from sources and data considered to be reliable, but its accuracy and completeness is not guaranteed. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. NOT BANK GUARANTEED, NOT FDIC INSURED, INVESTMENTS MAY LOSE VALUE.