Behavioral finance is the study of human behavior and how that behavior leads to investment errors—including the mispricing of assets. I find it to be the most interesting area of financial research, as it provides us with important insights we can use to improve investor behavior and produce better investment results. If investors are made aware of their biases and the negative impact they are likely to have on their returns, they are more likely to change their behavior.

The field of behavioral finance has gained an increasing amount of attention in academia during the past 15 years or so as more and more pricing anomalies have been discovered. Pricing anomalies present a problem for those who believe in the efficient markets hypothesis. Among the many anomalies researchers have found is that individual investors have a preference (or taste) for gambling when buying individual stocks.

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