How Does Behavioral Finance Use the Principles of Psychology to Explain

question 31

Essay

How does behavioral finance use the principles of psychology to explain stock market behavior? Give at least three specific examples of nonrational, yet common, thought processes that contribute to irrational fluctuations in the stock market, according to behavioral finance.

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Definitions:

Just Compensation

The fair market value that must be paid for property taken by the government through eminent domain.

Commercial Speech

Speech that promotes a commercial transaction, or advertisement, which is granted protection under the First Amendment but is subject to regulation.

First Amendment

The first addition to the U.S. Constitution, guaranteeing freedoms concerning religion, expression, assembly, and the right to petition.

Misleading

Providing false or inaccurate information that causes someone to believe something that is not true or does not present the full truth.