Behavioral Finance

Behavioral Finance

Definition of behavioral finance

Behavioral finance is the study of the effects of personal biases and psychological influences on traders or investors. Simply put, researchers try to analyze why individuals often make irrational financial decisions and lose money. Understanding these reasons can help make better financial choices.

Experts also use behavioral finance concepts to analyze the impact of emotions on the financial market, as they sometimes lead to sudden ups and downs in asset prices.

Basic biases in behavioral finance

Behavioral finance theory states that instead of being rational and calculating, people often make financial decisions based on emotions and cognitive biases. Here are five basic biases:

  1. Loss aversion is the tendency of an individual to make more sense of losses than of the same amount of profit. For example, it is better not to lose $100 than to find $100, because the pain of losing is greater than the pleasure of gain. As a result of this bias, the trader concentrates on loss avoidance, while financial opportunities are missed.
  2. Overconfidence biasis the tendency for a person to overestimate their abilities and knowledge, which can lead to wrong decisions in the presumptuous hope of outplaying the stock market.
  3. The narrative fallacy is the tendency for individuals to abandon evidence in favor of a good story. This means that traders may be drawn to less promising stocks just because their company has a better history.
  4. Anchoring biasoccurs when people rely too much on the first piece of information they get. For example, when buying any stock, many traders first look at the 52-week high or low price of that particular stock. This initial information is the “anchor.”
  5. Herding bias is the propensity of traders to imitate the actions of the crowd without regard to their own thoughts and knowledge. Herd instinct explains why investors buy in bull markets and sell in bear markets.
  6. Confirmation bias is the tendency of people to pay close attention to information that confirms their beliefs while ignoring information that contradicts them.

The findings of behavioral finance

Unlike traditional financial theory, behavioral finance theory includes the following beliefs:

  • Traders and investors are not always rational;
  • They often make financial decisions based on emotions and cognitive biases;
  • Market anomalies can sometimes be explained by psychology.

Understanding financial behavior can help people manage their money more rationally.


2024-05-20 • Updated

Frequently asked questions

  • How to start trading?

    If you are 18+ years old, you can join FBS and begin your FX journey. To trade, you need a brokerage account and sufficient knowledge on how assets behave in the financial markets. Start with studying the basics with our free educational materials and creating an FBS account. You may want to test the environment with virtual money with a Demo account. Once you are ready, enter the real market and trade to succeed.

  • How to open an FBS account?

    Click the 'Open account' button on our website and proceed to the Trader Area. Before you can start trading, pass a profile verification. Confirm your email and phone number, get your ID verified. This procedure guarantees the safety of your funds and identity. Once you are done with all the checks, go to the preferred trading platform, and start trading.

  • How to withdraw the money you earned with FBS?

    The procedure is very straightforward. Go to the Withdrawal page on the website or the Finances section of the FBS Trader Area and access Withdrawal. You can get the earned money via the same payment system that you used for depositing. In case you funded the account via various methods, withdraw your profit via the same methods in the ratio according to the deposited sums.

Deposit with your local payment systems

Data collection notice

FBS maintains a record of your data to run this website. By pressing the “Accept” button, you agree to our Privacy policy.


A manager will call you shortly.

Change number

Your request is accepted.

A manager will call you shortly.

Next callback request for this phone number
will be available in

If you have an urgent issue please contact us via
Live chat

Internal error. Please try again later

Don’t waste your time – keep track of how NFP affects the US dollar and profit!

You are using an older version of your browser.

Update it to the latest version or try another one for a safer, more comfortable and productive trading experience.

Safari Chrome Firefox Opera