Behavioral Finance in the Stock Market
The efficient market hypothesis (EMH) suggests that stock prices accurately reflect all available information, assuming perfect rationality among investors. However, this idea is challenged by studies showing historical events in the markets that can’t be fully explained by models based on perfect rationality. While EMH assumes a logical evaluation of stock prices, behavioral finance argues that social and psychological factors impact stock transactions. Understanding behavioral finance biases can be used daily to analyze stock movements, offering more understandable explanations for market anomalies like bubbles and recessions. Despite not being part of EMH, investors and portfolio managers find value in grasping behavioral finance trends and using them to study market fluctuations for decision-making in trading and investment strategies.