BEHAVIORAL FINANCE EVOLUTION, MODELS, AND APPLICATIONS

Abstract

Behavioral finance has emerged as a transformative field that challenges the traditional assumptions of rational decision-making in classical finance. Rooted in psychology and economics, it explores how cognitive biases, emotions, and social influences impact individual and institutional financial decisions. This paper reviews the evolution of behavioral finance from its early theoretical foundations to its current status as an interdisciplinary domain. Prominent models such as Prospect Theory, Mental Accounting, and Herd Behavior are examined, highlighting how they explain deviations from market efficiency. Furthermore, the study investigates the practical applications of behavioral finance in asset pricing, investment strategies, corporate decision-making, and financial policy formulation. By integrating insights from psychology, economics, and finance, behavioral finance provides a comprehensive framework for understanding real-world financial behaviors and anomalies. The findings emphasize the necessity of incorporating behavioral perspectives in financial models to bridge the gap between theory and practice, thereby fostering more robust decision-making frameworks for both investors and policymakers.