Foundations of Behavioral Finance: How Cognitive Biases Shape Financial Decisions

Classical economics assumes people make rational financial decisions. Decades of research in behavioral economics and psychology have shown otherwise. We buy high and sell low, hold losing investments too long, spend differently depending on where the money came from, and follow crowds into poor decisions. Understanding the specific mechanisms behind these behaviors is the first step toward countering them. By the end of this course you will be able to identify and explain the major cognitive biases affecting financial decision-making, recognize how mental accounting and framing effects distort economic judgment, understand why loss aversion leads to predictable investing errors, and apply a basic framework for evaluating whether a financial decision is being influenced by bias. What you will learn: - Loss aversion: why losses feel roughly twice as painful as equivalent gains — and how this drives poor investing choices - Mental accounting: how treating money differently based on its source or mental category leads to contradictory decisions - The herd mentality and social proof in financial markets: why following the crowd is so compelling and so costly - Anchoring bias: how irrelevant reference points distort price judgments and negotiation outcomes - The endowment effect: why we overvalue things we already own - Confirmation bias in financial research: how we seek information that confirms existing beliefs - Hyperbolic discounting: why we consistently prefer smaller rewards now to larger rewards later - Overconfidence bias and its particular effect on individual stock selection and trading frequency The course is organized into four sections: an introduction to behavioral economics and its departure from rational-actor models, a survey of the major cognitive biases, a review of how these biases manifest in common financial contexts, and a closing framework for bias-aware decision-making. Each section uses research findings, illustrative scenarios, and reflection prompts. Designed for anyone who makes financial decisions — which is everyone — and is curious about why those decisions are often less rational than they appear. No prior economics or psychology background is required. This course is educational and informational.