Behavioral Finance: The Role of Psychology

Behavioral Finance is a relatively recent revolution in finance that applies insights from all of the social sciences to finance. New decision-making models incorporate psychology and sociology, among other other disciplines, to explain economic and financial phenomenom, such as erratic stock price variations. Pyschological patterns such as overconfidence and perceived kinks in the value function seem to impact financial decision-making but are NOT included classical theories such as the Expected Utility Theory.