Behavioral finance(redirected from Psychology of markets)
Also found in: Wikipedia.
Behavioral finance combines psychology and economics to explain why and how investors act and to analyze how that behavior affects the market.
Behavioral finance theorists point to the market phenomenon of hot stocks and bubbles, from the Dutch tulip bulb mania that caused a market crash in the 17th century to the more recent examples of junk bonds in the 1980s and Internet stocks in the 1990s, to validate their position that market prices can be affected by the irrational behavior of investors.
Behavioral finance is in conflict with the perspective of efficient market theory, which maintains that market prices are based on rational foundations, like the fundamental financial health and performance of a company.