Behavioral finance analyses how investors’ cognitive biases and emotions impact trading behavior and performance. Behavioral finance uses findings from psychology, sociology, and finance to analyse how psychological and social factors impact investment decisions. It shows that both small- and institutional investors systematically make mistakes when investing. Investors for example have difficulties interpreting probabilities or let emotions take the upper hand. As such, investors are less rational than assumed by standard finance.
By being aware of these behavioral biases, it is possible to avoid some of them. This should help limit their negative impact on your performance.