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Behavioral Finance: The Big Picture

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Behavioral finance has become a very hot topic, generating credence with the rupture of the tech-stock bubble in March of 2000. It was pushed to the forefront of both investors' and advisors' minds with the financial market meltdown of 2008–2009. A variety of confusing terms may arise from a proliferation of topics resembling behavioral finance, at least in name, including: behavioral science, investor psychology, cognitive psychology, behavioral economics, experimental economics, and cognitive science, to name a few. Furthermore, many investor psychology books refer to various aspects of behavioral finance but fail to fully define it. In this section, we will discuss some of the acclaimed authors in the field and review their outstanding work (not an exhaustive list), which will provide a broad overview of the subject. We will then examine the two primary subtopics in behavioral finance: behavioral finance micro and behavioral finance macro. Finally, we will observe the ways in which behavioral finance applies specifically to wealth management.

Behavioral Finance and Your Portfolio

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