The difference between traditional finance and behavioral finance

Traditional finance is based on the assumption that people are rational and that they act in their own best interest. Behavioral finance, on the other hand, is based on the assumption that people are not always rational and often do things for reasons other than profit.

Behavioral finance can be used to better understand why people behave in certain ways when it comes to investing. This can be useful for predicting what will happen in markets and economies.

With more emphasis on individual responsibility and behavioral finance, the classical school of thought has been primarily utilised by those who want to develop self-control. A modified version of this school of thought shall, to some extent, be viewing people as rational beings and ascribe their mistakes to imperfect circumstances leading them to act irrationally.

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