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Finance Dictionary and Glossary of Investment Terms
A field of finance that proposes psychology-based theories to explain stock market anomalies. Within behavioral finance it is assumed that the information structure and the characteristics of market participants systematically influence individuals' investment decisions as well as market outcomes.
A theory stating that there are important psychological and behavioral variables involved in investing in the stock market that provide opportunities for smart investors to profit. For example, when a certain stock or sector becomes "hot" and prices increase substantially without a change in the company’s fundamentals, behavioral finance theorists would attribute this to mass psychology. They therefore might short the stock in the long term, believing that eventually the psychological bubble will burst and they will profit.