Behavioural Finance means constantly combining the lessons of modern portfolio theory, the rationale of valuation models and the systematic analysis of information, thus enabling the psychological state of the market to be assessed. Why should we concern ourselves with the psychology of market participants?
Because investors do not always react rationally to fundamentals.
Thus, asset valuation taken individually and collectively regularly differs from the fundamental balance as it results from valuation models. The perception and opinions an investor has of the market or of a security play an important role in the short and medium term, whereas in the long term, the fundamentals should not be disregarded.
Information about the psychology of the market helps to mitigate some of those discrepancies in the short term. They enable the portfolio to be adapted in time to take advantage of trends and cycles.
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