All in a day's work

First and foremost. I am not a guru in this area but I've been interested in this for some time and did some readup. My posts on this topic, for sharing, might be fairly shallow and critics would be apppreciated.

"Behavioral finance is a rapidly growing area that deals with the influence of psychology on the behavior of financial practitioners."

"Behavioral finance is the application of psychology to financial behavior—the behavior of practitioners."

"Behavioral finance is the study of how psychology affects financial decision making and financial markets."Shefrin (2001)

For a while, theoretical and empirical evidence suggested that CAPM, EMH and other rational financial theories did a respectable job of predicting and explaining certain events. However, as time went on, academics in both finance and economics started to find anomalies and behaviors that couldn't be explained by theories available at the time. While these theories could explain certain "idealized" events, the real world proved to be a very messy place in which market participants often behaved very unpredictably.

Important Characters to BF:

Daniel Kahneman and Amos Tversky

• Fathers of behavioral economics/finance in the late 1960
• Published about 200 works, relating to psychological concepts with implications for BF
• In 2002, Kahneman received the Nobel Memorial Prize in Economic Sciences for his contributions to the study of rationality in economics
• Focused much of their research on the cognitive biases and heuristics that cause people to engage in unanticipated irrational behavior.

Richard Thaler

• This field would not have evolved if it weren't for economist Richard Thaler.
• During his studies, Thaler became aware of the shortcomings in conventional economic theoryies as they relate to people's behaviors.
• After reading a draft version of Kahneman and Tversky's work on prospect theory, Thaler realized that, unlike conventional economic theory, psychological theory could account for the irrationality in behaviors.
• Thaler went on to collaborate with Kahneman and Tversky, blending economics and finance with psychology to present concepts, such as mental accounting, the endowment effect and other biases.

The presence of regularly occurring anomalies in conventional economic theory was a big contributor to the formation of behavioral finance. These so-called anomalies, and their continued existence, directly violate modern financial and economic theories, which assume rational and logical behavior.
Examples of Anomalies: The Winner's Curse, January Effect, Equity Premium Puzzle and etc.

Conventional financial theory does not account for all situations that happen in the real world. This is not to say that conventional theory is not valuable, but rather that the addition of behavioral finance can further clarify how the financial markets work.