Question

behavioral finance suggests that a. investors are not informed b. individuals make rational investment decisions c. investors may be subject to bias which leads to excessive buying or selling of stocks d. emotion plays only a minor role in security selection

Answer 1

Behavioral finance recognizes the importance of psychological factors in investment decisions, demonstrating that investors' biases and emotions can lead to seemingly irrational behaviors like excessive trading.

Step-by-step explanation:

Behavioral finance suggests that investors may be subject to bias which leads to excessive buying or selling of stocks.

Unlike traditional economic models that assume rational decision-making, behavioral finance integrates psychology to understand how emotions and cognitive biases can impact investors' choices.

Such biases include the tendency to overvalue a loss compared to an equivalent gain, or to over withhold on taxes due to the preference for a potential refund.

This perspective acknowledges that individuals can make decisions that seem irrational, such as excessive trading based on optimism or fear, implicating that the state of mind plays a significant role in economic behavior.