An investment in various companies has become complex as people invested large sum of money even when there is a little change of company being profitable. Most of the investors have rational expectations and maximize their utility. However, behavioral economist argues based on their active studies that market are not efficient, especially in the short-run and people do not make rational decisions to maximize profits. Human beings are susceptible to numerous behavioral anomalies which became counterproductive to the wealth maximization principles leading to irrational behavior. Decisions can never be made in a vacuum by relying on the personal resources and complex models, which do not take into consideration the situation. Analysis of the variables of the problem in which it occurs is mediated by the cognitive psychology of the manager. A situation based on decision making activity encompasses not only the specific problem faced by the individual but also extends to the environment. Behavioral finance models often rely on a concept of individual investors who are prone to judgment and decision-making errors. This paper examines the meaning and importance of behavioral finance and its application in investment decisions. Which encompasses research that drops the traditional assumptions of expected utility maximization with rational investors in efficient markets?
Behavioral Finance, Decision making, Mental accounting, Irrational emotions, Over-confidence, Cognitive dissonance
