Behavioural Finance
Behavioural finance studies the psychology and behaviour of market participants and shows why their decisions are often neither rational nor efficient.
Approx. 1 min read · Updated October 9, 2026
What is behavioural finance?
Behavioural finance is a field of research that deals with the psychology and behaviour of market participants when they take financial risks. It aims to show which mistakes are made again and again in trading and that decisions are not always as rational and efficient as classical economic theory assumes. In short: how do people really act in the markets?
The field combines economics and psychology. Much of the groundwork was laid by the psychologists Daniel Kahneman and Amos Tversky, whose prospect theory describes how people evaluate gains and losses.
Typical behavioural patterns
- Loss aversion: losses are felt more strongly than gains of the same size, so traders tend to hold losing positions too long in the hope of a turnaround.
- Disposition effect: profits are taken too early while losses are left to run, the opposite of the well-known rule "cut your losses and let your profits run".
- Overconfidence: after a series of winning trades, people tend to overestimate their abilities and take on too much risk.
- Confirmation bias: information that supports one's own view is given more weight than information that contradicts it.
- Herd behaviour: market participants follow the crowd, which can reinforce exaggerated price movements.
Why it matters for traders
A good trading education and technical tools are one thing, but it is just as important to examine your own behaviour patterns in certain situations and to eliminate weaknesses and wrong habits. Clear rules in a trading system, predefined stop rules and a trading journal help to recognise and avoid typical mistakes. More on the mental side of trading can be found under trading psychology.
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More terms.
- Trading SystemA trading system is a defined set of rules for entering, managing and closing positions, including the markets traded and strict risk and money management.
- Risk ManagementRisk management in trading means deciding how much of the total capital to risk on each trade and across all open positions, and adjusting that risk to market conditions.
- Profit-TakingProfit-taking means closing profitable positions to realise gains. After strong price moves, widespread profit-taking can trigger a correction.
- Stop Rules in Market TechniqueRules for placing and trailing stops purely on the basis of chart structure – beyond the last point 3 when trading the trend, or at the last candle's high or low when trading the movement.