Behavioral finance is the study of how psychology influences financial decisions. It emerged when academics noticed that real investors consistently deviate from the 'rational agent' model assumed by classical economics.

The core insight: The human brain was not designed to evaluate probabilities, discount future cash flows, or remain emotionally neutral in the face of financial gains and losses. We use mental shortcuts — called heuristics — that served our ancestors well on the savanna but can lead us badly astray in markets.

Why this matters: - Market prices are set by human beings, not robots — biases are embedded in prices - Understanding your own biases is the first step to guarding against them - Recognizing biases in others can reveal market mispricings

The two cognitive systems: - System 1 (fast): Automatic, intuitive, emotional — fires first, fires fast - System 2 (slow): Deliberate, analytical, logical — requires effort to engage

Most investing errors occur when System 1 hijacks decisions that should belong to System 2. The remedy is not to eliminate intuition, but to know when to override it with structured analysis.