Portfolio · Investing Glossary
What Is Behavioral Finance?
The study of how psychology and emotion cause investors to make irrational financial decisions.
The Full Definition
Behavioral finance studies how cognitive biases and emotions — fear, greed, overconfidence, herd mentality — lead investors to make decisions that hurt their own returns. The single biggest driver of underperformance for individual investors isn't bad stock picks; it's behavior: panic-selling during crashes and chasing performance after rallies. Studies consistently show the average investor underperforms the very funds they invest in, almost entirely due to badly timed buying and selling.
Real-World Example
Annual investor behavior studies have repeatedly found that the average equity fund investor earns several percentage points less per year than the S&P 500 itself — not because they picked bad funds, but because they sold during downturns and bought back in after recoveries had already happened.
Related Terms
- Market TimingAttempting to predict market movements and buy/sell accordingly.
- Risk ToleranceYour ability — financially and emotionally — to handle investment losses.
- VolatilityThe degree of price fluctuation in an asset over time.
- Buy and HoldAn investment strategy of purchasing assets and holding them for the long term regardless of short-term volatility.