What is the difference between behavioral finance and classical finance?

What is the difference between behavioral finance and classical finance Introduction: The Intersection of Finance and Human Behavior Hello everyone, and welcome to today's video. Finance, as a field, has long been associated with numbers, data, and rational decision-making. However, the emergence of behavioral finance has challenged this traditional perspective. In this video, we will explore the key differences between behavioral finance and classical finance, and how understanding human behavior is crucial in the world of finance. Classical Finance: The Rational Approach Classical finance, also known as traditional finance, is based on the assumption that market participants are rational and make decisions that maximize their utility. It relies heavily on mathematical models, such as the Efficient Market Hypothesis (EMH) and Modern Portfolio Theory (MPT). These theories suggest that markets are efficient, and asset prices reflect all available information. In classical finance, the focus is on analyzing financial statements, historical data, and market trends to make informed investment decisions. Behavioral Finance: Unraveling the Human Element Behavioral finance, on the other hand, recognizes that market participants are not always rational. It delves into the psychological and emotional factors that influence decision-making. Behavioral finance draws insights from various fields, including psychology and sociology, to understand why individuals often deviate from rationality. For example, it explores concepts like cognitive biases, herd behavior, and overconfidence.