Behavioral Finance

Why it matters

• Challenges the efficient market hypothesis by highlighting cognitive biases like loss aversion, overconfidence, and herd mentality.
• Assists policymakers in designing better financial regulations and consumer protection frameworks by accounting for predictable human errors.
• Provides a framework for understanding market anomalies and asset bubbles that cannot be explained by purely rational mathematical models.

How it is asked

Focus on how behavioral biases influence investor behavior, the impact of these biases on market stability, and the role of 'nudge' theory in public policy and financial literacy programs.