Uncovering Why People Make Irrational Financial Decisions: The Impact of Behavioral Finance
Behavioral finance combines psychology with traditional finance to explain why people make irrational financial decisions. People often distort probabilities and values when making choices, especially when faced with uncertainty. This can lead to decisions that go against their best interests. Researchers have developed theories like prospect theory and composite cumulative prospect theory to better understand these behaviors. By considering how people perceive risk and make decisions, we can gain insights into why individuals sometimes act irrationally in financial matters.