Collectively, consumers tend to make some very strange choices when it comes to how they make purchases and manage their money. Similarly, investors in financial markets also tend to think as a group and make irrational decisions. It is almost uncanny how an event can trigger so many market participants to unconsciously react in the same ways.
Behavioral finance is a response to this strange behavior. The theory attempts to explain how investors process events and formulate decisions. Theoretically, understanding behavioral finance allows other investors to predict market movements and profit from them.