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In classical finance, traders and investors should always make rational decisions to maximise their self-interests, but in practice, quite often they end up making decisions that are not always rational, due to the influence of emotions and cognitive biases.

There is a whole (relatively new field) of finance called behavioral finance, which seeks to understand why this happens.

Behavioral finance is the branch of finance that combines classical finance (rational decision-making) with the psychological/behavioral aspect of market participants.

In layman terms, classical finance tells us what people should do, whereas behavioral finance tells us what people actually do.

The main reason for this difference is that classical finance assumes that humans are rational decision-making robots, but in reality humans are subject to emotions, flawed thinking, cognitive biases, etc.

If you have tried trading in the markets, or even played a game of chance like poker, you will know how hard it is to make rational decisions once money is at stake, and greed and fear starts to cloud your judgement.

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Hi, Spencer here! 😀

After making my first million at 28, and trading & teaching across 60+ countries, I have consolidated my knowledge and experience to create the most comprehensive & practical guides for profitable trading, compiled from thousands of books, websites, courses, and interviews with professionals.

comment-img As a former professional trader in private equity and proprietary funds, I have over 15 years of market experience, and have been featured on more than 20 occasions in the media.
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