Human biases that lead to investment missteps

TRADITIONAL portfolio theory has it that investors think and behave rationally, and that markets are efficient, incorporating all available information into prices.

In the last couple of decades, however, market's boom/bust cycles have largely overturned this notion of rationality. In fact, there is ample evidence that markets are often irrational, overshooting fundamental values on the upside and downside. This is because investors themselves are irrational, driven largely by excesses of fear and greed.

Behavioural finance is an academic discipline that has emerged to study investor behaviour, errors and the human decision-making process. As Vanguard said in a paper, behavioural finance takes insights from psychology and applies them to financial decision making.