How psychology moves markets
Behavioural finance studies how real, psychologically driven investors actually behave — and how their collective biases move prices in ways a purely rational model cannot explain. These pages give an educational overview of the field's key ideas: prospect theory and how people value gains and losses asymmetrically, the efficient market hypothesis and its limits, market sentiment and crowd behaviour, reflexivity, and the anatomy of bubbles, panic selling, euphoria and the contrarian stance that fades the crowd. The aim is understanding market psychology, not a system for predicting it.
Behavioral Finance: Behavioural finance is the field that studies how psychological biases and emotions affect the financial decisions of investors and, in aggregate, the behaviour of markets. It challenges the assumption of perfectly rational actors with concepts such as prospect theory (asymmetric valuation of gains and losses), mental accounting and herding, and it explains phenomena the efficient market hypothesis struggles with — sentiment swings, crowd behaviour, reflexivity, bubbles, panics and euphoria. For a trader it is educational context for why markets overshoot and how collective psychology creates the extremes that contrarians study; it is not a timing system.
Prospect Theory
Behavioral financeProspect theory, developed by Kahneman and Tversky in 1979, describes how people actually value risky outcomes as gains and losses measured from a re…
Efficient Market Hypothesis (overview)
Behavioral financeThe efficient market hypothesis, formalised by Eugene Fama, argues that asset prices already reflect available information so that consistently beati…
Market Sentiment
Behavioral financeMarket sentiment is the aggregate mood or attitude of investors toward a market or asset, swinging between fear and greed, that can push prices away …
Crowd Behaviour
Behavioral financeCrowd behaviour in markets is the tendency of participants to imitate one another rather than act on independent analysis, producing herding, informa…
Reflexivity (overview)
Behavioral financeReflexivity, a concept popularised by George Soros, is the idea that participants' biased perceptions and market prices influence each other in a two…
Market Bubbles
Behavioral financeA market bubble is an episode in which the price of an asset rises far above any reasonable estimate of its fundamental value, driven by speculation,…
Panic Selling
Behavioral financePanic selling is the fear-driven, often indiscriminate mass selling of assets during a sharp decline, amplified by loss aversion, herding, stops and …
Market Euphoria
Behavioral financeMarket euphoria is the phase of extreme, often unjustified optimism near the top of a rising market, characterised by extrapolation of recent gains, …
Contrarian Thinking
Behavioral financeContrarian thinking is the disciplined practice of forming an independent view that may run against prevailing crowd sentiment, especially at extreme…