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Behavioral Finance: Biases, Emotions and Financial Behavior

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What Is Behavioral Finance?

Understanding behavioral finance, behavioral finance concepts.

• Biases Studied
• The Stock Market
• Behavioral Finance FAQs

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

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Behavioral finance, a subfield of behavioral economics , proposes that psychological influences and biases affect the financial behaviors of investors and financial practitioners. Moreover, influences and biases can be the source for the explanation of all types of market anomalies and specifically market anomalies in the stock market, such as severe rises or falls in stock price. As behavioral finance is such an integral part of investing, the Securities and Exchange Commission has staff specifically focused on behavioral finance.

Key Takeaways

• Behavioral finance is an area of study focused on how psychological influences can affect market outcomes.
• Behavioral finance can be analyzed to understand different outcomes across a variety of sectors and industries.
• One of the key aspects of behavioral finance studies is the influence of psychological biases.
• Some common behavioral financial aspects include loss aversion, consensus bias, and familiarity tendencies.
• The efficient market theory which states all equities are priced fairly based on all available public information is often debunked for not incorporating irrational emotional behavior.

Behavioral finance can be analyzed from a variety of perspectives. Stock market returns are one area of finance where psychological behaviors are often assumed to influence market outcomes and returns but there are also many different angles for observation. The purpose of the classification of behavioral finance is to help understand why people make certain financial choices and how those choices can affect markets.

Within behavioral finance, it is assumed that financial participants are not perfectly rational and self-controlled but rather psychologically influential with somewhat normal and self-controlling tendencies. Financial decision-making often relies on the investor's mental and physical health. As an investor's overall health improves or worsens, their mental state often changes. This impacts their decision-making and rationality towards all real-world problems, including those specific to finance.

One of the key aspects of behavioral finance studies is the influence of biases. Biases can occur for a variety of reasons. Biases can usually be classified into one of five key concepts. Understanding and classifying different types of behavioral finance biases can be very important when narrowing in on the study or analysis of industry or sector outcomes and results.

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Behavioral finance typically encompasses five main concepts:

• Mental accounting : Mental accounting refers to the propensity for people to allocate money for specific purposes.
• Herd behavior : Herd behavior states that people tend to mimic the financial behaviors of the majority of the herd. Herding is notorious in the  stock market  as the cause behind dramatic rallies and sell-offs.
• Emotional gap : The emotional gap refers to decision-making based on extreme emotions or emotional strains such as anxiety, anger, fear, or excitement. Oftentimes, emotions are a key reason why people do not make rational choices.
• Anchoring : Anchoring refers to attaching a spending level to a certain reference. Examples may include spending consistently based on a budget level or rationalizing spending based on different satisfaction utilities. 
• Self-attribution : Self-attribution refers to a tendency to make choices based on overconfidence in one's own knowledge or skill. Self-attribution usually stems from an intrinsic knack in a particular area. Within this category, individuals tend to rank their knowledge higher than others, even when it objectively falls short.

Behavioral finance is exploited through credit card rewards, as consumers are more likely to be willing to spend points, rewards, or miles as opposed to paying for transactions with direct cash.

Some Biases Revealed by Behavioral Finance

Breaking down biases further, many individual biases and tendencies have been identified for behavioral finance analysis. Some of these include:

Confirmation Bias

Confirmation bias  is when investors have a bias toward accepting information that confirms their already-held belief in an investment. If information surfaces, investors accept it readily to confirm that they're correct about their investment decision—even if the information is flawed.

Experiential Bias

An experiential bias occurs when investors' memory of recent events makes them biased or leads them to believe that the event is far more likely to occur again. For this reason, it is also known as recency bias or availability bias.

For example, the financial crisis in 2008 and 2009 led many investors to exit the stock market. Many had a dismal view of the markets and likely expected more economic hardship in the coming years. The experience of having gone through such a negative event increased their bias or likelihood that the event could reoccur. In reality, the economy recovered, and the market bounced back in the years to follow.

Loss Aversion

Loss aversion occurs when investors place a greater weighting on the concern for losses than the pleasure from market gains. In other words, they're far more likely to try to assign a higher priority to avoiding losses than making investment gains.

As a result, some investors might want a higher payout to compensate for losses. If the high payout isn't likely, they might try to avoid losses altogether even if the investment's risk is acceptable from a rational standpoint.

Applying loss aversion to investing, the so-called disposition effect occurs when investors sell their winners and hang onto their losers. Investors' thinking is that they want to realize gains quickly. However, when an investment is losing money, they'll hold onto it because they want to get back to even or their initial price. Investors tend to admit they are correct about an investment quickly (when there's a gain).

However, investors are reluctant to admit when they made an investment mistake (when there's a loss). The flaw in disposition bias is that the performance of the investment is often tied to the entry price for the investor. In other words, investors gauge the performance of their investment based on their individual entry price disregarding fundamentals or attributes of the investment that may have changed.

Familiarity Bias

The familiarity bias is when investors tend to invest in what they know , such as domestic companies or locally owned investments. As a result, investors are not diversified across multiple sectors and types of investments, which can reduce risk. Investors tend to go with investments that they have a history or have familiarity with.

Familiarity bias can occur in so many ways. You may resist investing in a specific company because of what industry it is in, where it operates, what products it sells, who oversees the management of the company, who its clientele base is, how it performs its marketing, and how complex its accounting is.

Behavioral Finance in the Stock Market

The  efficient market hypothesis (EMH) says that at any given time in a highly  liquid market , stock prices are efficiently valued to reflect all the available information. However, many studies have documented long-term historical phenomena in securities markets that contradict the efficient market hypothesis and cannot be captured plausibly in models based on perfect investor rationality.

The EMH is generally based on the belief that market participants view stock prices rationally based on all current and future intrinsic and external factors. When studying the stock market, behavioral finance takes the view that markets are not fully efficient. This allows for the observation of how psychological and social factors can influence the buying and selling of stocks.

The understanding and usage of behavioral finance biases can be applied to stock and other trading market movements on a daily basis. Broadly, behavioral finance theories have also been used to provide clearer explanations of substantial market anomalies like bubbles and deep recessions. While not a part of EMH, investors and portfolio managers have a vested interest in understanding behavioral finance trends. These trends can be used to help analyze market price levels and fluctuations for speculation as well as decision-making purposes. 

What Does Behavioral Finance Tell Us?

Behavioral finance helps us understand how financial decisions around things like investments, payments, risk, and personal debt, are greatly influenced by human emotion, biases, and cognitive limitations of the mind in processing and responding to information.

How Does Behavioral Finance Differ From Mainstream Financial Theory?

Mainstream theory, on the other hand, makes the assumptions in its models that people are rational actors, that they are free from emotion or the effects of culture and social relations, and that people are self-interested utility maximizers. It also assumes, by extension, that markets are efficient and firms are rational profit-maximizing organizations. Behavioral finance counters each of these assumptions.

How Does Knowing About Behavioral Finance Help?

By understanding how and when people deviate from rational expectations, behavioral finance provides a blueprint to help us make better, more rational decisions when it comes to financial matters.

What Is an Example of a Finding in Behavioral Finance?

Investors are found to systematically hold on to losing investments far too long than rational expectations would predict, and they also sell winners too early. This is known as the disposition effect, and is an extension of the concept of loss aversion to the domain of investing. Rather than locking in a paper loss, investors holding lose positions may even double down and take on greater risk in hopes of breaking even.

• Behavioral Finance: Biases, Emotions and Financial Behavior 1 of 27
• An Introduction to Behavioral Finance 2 of 27
• Understanding Investor Behavior 3 of 27
• Market Psychology: What Is It and Predictions 4 of 27
• How the Power of the Masses Drives the Market 5 of 27
• How to Read the Psychological State of the Market with Technical Indicators 6 of 27
• Herd Instinct: Definition, Stock Market Examples, & How to Avoid 7 of 27
• Financial Markets: When Fear and Greed Take Over 8 of 27
• 4 Behavioral Biases and How to Avoid Them 9 of 27
• How to Avoid Emotional Investing 10 of 27
• 8 Psychological Traps Investors Should Avoid 11 of 27
• 3 Psychological Quirks That Can Affect Your Trading 12 of 27
• Removing the Barriers to Successful Investing 13 of 27
• How to Break Bad Trading Habits 14 of 27
• Random Reinforcement: Why Most Traders Fail 15 of 27
• How to Develop a "Trading Brain" 16 of 27
• Let Your Profits Run: Overview, History, Example 17 of 27
• The Art of Cutting Your Losses 18 of 27
• Positive Feedback: What it is, How it Works 19 of 27
• Loss Aversion: Definition, Risks in Trading, and How to Minimize 20 of 27
• Psychological Coping Strategies for Handling Losses 21 of 27
• Regret Avoidance: Meaning, Prevention, Market Crashes 22 of 27
• Technical Analysis That Indicates Market Psychology 23 of 27
• The Psychology of Support and Resistance Zones 24 of 27
• Going All-in: Investing vs. Gambling 25 of 27
• The Downward Spiral of Trading Addiction 26 of 27
• The Casino Mentality in Trading 27 of 27

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Behavioral Finance

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on September 04, 2023

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Table of contents, what is behavioral finance.

Behavioral finance is a field of study that combines psychological theories with conventional economic and financial theories to understand the impact of cognitive biases and emotions on financial decision-making. This interdisciplinary approach helps explain why people often make irrational financial choices, deviating from the assumptions of traditional finance models.

Understanding behavioral finance is crucial for investors, financial professionals, and policymakers as it provides valuable insights into the psychological factors influencing financial decisions. By identifying and addressing these biases, individuals, and organizations can make better-informed decisions, ultimately improving financial outcomes and market efficiency.

Traditional finance is based on the assumption that market participants are rational and make decisions to maximize their utility.

In contrast, behavioral finance acknowledges that individuals are often irrational, driven by cognitive biases and emotions that can lead to suboptimal financial decisions.

Key Concepts in Behavioral Finance

Bounded rationality.

Bounded rationality is the idea that individuals have limited cognitive resources, time, and information to make optimal decisions. As a result, people often rely on heuristics or mental shortcuts to simplify complex decision-making processes.

Heuristics are mental shortcuts that individuals use to make quick and efficient decisions. While heuristics can be helpful, they can also lead to systematic errors or biases in judgment.

Prospect Theory

Daniel Kahneman and Amos Tversky developed prospect theory as a cornerstone of behavioral finance.

It posits that people evaluate financial outcomes based on gains and losses relative to a reference point rather than final wealth levels. Individuals are also more sensitive to losses than gains, exhibiting loss aversion.

Mental Accounting

Mental accounting, introduced by Richard Thaler, refers to the tendency of individuals to categorize and evaluate financial transactions in separate mental accounts, which can influence their financial choices and risk-taking behavior.

Overconfidence

Overconfidence is a cognitive bias that causes people to overestimate their knowledge, skills, or ability to predict future outcomes. In finance, overconfidence can lead to excessive trading, under-diversification, and inadequate risk management.

Confirmation Bias

Confirmation bias is the tendency to seek, interpret, and remember information that confirms one's pre-existing beliefs while ignoring or discounting contradictory evidence.

This bias can contribute to investment mistakes, such as holding onto losing positions or overlooking red flags.

Anchoring refers to the tendency of individuals to rely heavily on the first piece of information they encounter when making decisions. In financial contexts, anchoring can lead to irrational pricing and investment decisions based on arbitrary reference points.

Loss Aversion

Loss aversion is the tendency for individuals to prefer avoiding losses over acquiring equivalent gains. This bias can lead to risk-averse behavior when facing potential gains and risk-seeking behavior when facing potential losses.

Herding Behavior

Herding behavior is individuals' tendency to follow a larger group's actions or beliefs, even if it contradicts their own judgment or available information. In finance, herding can contribute to market bubbles and crashes.

Availability Bias

Availability bias is the tendency to rely on readily available information or recent experiences when making decisions, often leading to a distorted perception of probabilities and risks.

Cognitive Biases in Financial Decision-Making

Representativeness bias.

Representativeness bias is the tendency to judge the likelihood of an event or the accuracy of a hypothesis based on its similarity to a particular category or prototype. In finance, this bias can cause investors to incorrectly assess the performance of an investment or company based on superficial resemblances to other successful investments or companies.

Conservatism Bias

Conservatism bias refers to the tendency to underreact to new information, maintaining prior beliefs or forecasts even when presented with evidence that contradicts them. In financial decision-making, conservatism bias can lead to slow adjustments in investment strategies and a failure to capitalize on market opportunities.

Hindsight Bias

Hindsight bias is the inclination to believe, after an event, that one would have predicted or expected the outcome. This bias can distort the perception of investment performance and contribute to overconfidence in future decision-making.

Recency Bias

Recency bias is the tendency to overemphasize the importance of recent events or data when making decisions.

In finance, recency bias can result in investors chasing recent market trends or overreacting to short-term performance, neglecting long-term fundamentals.

Self-Serving Bias

Self-serving bias is the tendency to attribute successes to one's own abilities or actions and failures to external factors. In finance, self-serving bias can lead to overconfidence, underestimation of risks, and a reluctance to admit or learn from mistakes.

Endowment Effect

The endowment effect is the tendency to value an asset more highly when it is owned compared to when it is not. This bias can cause investors to hold onto underperforming assets or demand higher prices when selling, leading to suboptimal portfolio management .

Regret Aversion

Regret aversion is the tendency to avoid making decisions that could lead to feelings of regret, often causing individuals to be overly cautious or to follow the crowd. In finance, regret aversion can result in inaction, missed opportunities, or herding behavior.

Disposition Effect

The disposition effect refers to the tendency of investors to sell winning investments too early while holding onto losing investments too long. This behavior is driven by the desire to avoid regret and the effects of loss aversion and mental accounting.

Gambler's Fallacy

Gambler's fallacy is the belief that the probability of future events is influenced by past events, even when the events are independent. In finance, this fallacy can cause investors to make irrational decisions based on perceived patterns in market data or stock prices.

Emotional Biases in Financial Decision-Making

Emotional biases are irrational decision-making tendencies driven by emotions, such as fear, greed, or hope, rather than objective information or analysis.

Overreaction and Underreaction

Overreaction and underreaction refer to the tendency of investors to react excessively or insufficiently to new information, often driven by emotions. Overreaction can lead to market bubbles or crashes, while underreaction can result in missed opportunities or slow adjustments to changing market conditions.

Overoptimism and Pessimism

Overoptimism and pessimism are emotional biases that cause individuals to have an unrealistically positive or negative outlook on future events or investment outcomes. These biases can lead to excessive risk-taking, inadequate diversification , or overly conservative investment strategies.

Fear and Greed

Fear and greed are powerful emotions that can significantly influence financial decision-making. Fear can cause investors to avoid risks, sell assets prematurely, or remain on the sidelines during market opportunities. Greed can lead to excessive risk-taking, overtrading, or chasing market trends.

Affect Heuristic

The affect heuristic is the tendency to make decisions based on the emotional responses or feelings associated with a particular choice rather than objective analysis or information. In finance, the affect heuristic can lead to irrational investment decisions driven by emotions such as fear, excitement, or attachment to specific assets or companies.

Sunk-Cost Fallacy

The sunk-cost fallacy is the tendency to continue investing in a project or asset based on the amount of resources already invested rather than evaluating the current and future value of the investment. This bias can lead to poor investment decisions and an unwillingness to cut losses when necessary.

Status Quo Bias

Status quo bias is the preference for maintaining current affairs, even when change could result in improved outcomes.

In finance, status quo bias can result in investors maintaining suboptimal portfolios, resisting change in investment strategies, or overlooking new opportunities.

Market Anomalies and Behavioral Finance

Definition of market anomalies.

Market anomalies are patterns or occurrences in financial markets that deviate from the predictions of traditional finance models, often attributed to the influence of behavioral biases.

Momentum Effect

The momentum effect is the tendency of assets that have recently experienced high returns to continue outperforming and assets with low returns to continue underperforming. This anomaly can be explained by investors' overreaction, underreaction to new information, and herding behavior.

Reversal Effect

The reversal effect is the phenomenon where assets that have experienced extreme short-term gains or losses tend to revert to their mean performance over time. This anomaly can be attributed to investors' overreaction to recent events and the subsequent correction of mispricing.

Calendar Anomalies

Calendar anomalies are asset return patterns associated with specific calendar periods or events. Some common calendar anomalies include:

January Effect

The January effect is the tendency for stocks , particularly small-cap stocks, to experience higher returns in January compared to other months.

Weekend Effect

The weekend effect is the phenomenon where stock returns are generally lower on Fridays and higher on Mondays.

Holiday Effect

The holiday effect refers to the tendency for stock prices to increase around holidays or during shortened trading weeks.

Value and Growth Stocks

Value stocks are those that are considered undervalued based on their financial fundamentals, while growth stocks are those with higher-than-average growth potential. Behavioral finance theories suggest that value stocks tend to outperform growth stocks due to investors' overreaction to negative news or underreaction to positive news, leading to mispricing.

Size Effect

The size effect is the tendency for smaller companies to generate higher risk-adjusted returns compared to larger companies. This anomaly can be attributed to behavioral biases such as investors' neglect of small-cap stocks and the overestimation of large-cap stocks' growth potential.

Post-earnings Announcement Drift

The post-earnings announcement drift is the tendency for stock prices to continue drifting in the direction of an earnings surprise, even after the initial market reaction. Investors' underreaction can explain this anomaly to new information and the gradual incorporation of the news into stock prices.

The Role of Market Anomalies in Behavioral Finance

Market anomalies serve as evidence of the influence of behavioral biases on financial markets, challenging the assumptions of market efficiency and rationality in traditional finance models. By studying these anomalies, researchers and practitioners can better understand the impact of cognitive and emotional factors on asset pricing and investment decision-making.

Applications of Behavioral Finance

Personal finance and investing.

Behavioral finance can help individuals recognize and address their own cognitive biases and emotional tendencies, leading to better financial decision-making and improved investment outcomes.

Corporate Finance

In corporate finance, understanding behavioral biases can help managers make more informed decisions regarding capital allocation, risk management, and mergers and acquisitions .

Portfolio Management

Portfolio managers can apply behavioral finance principles to construct diversified portfolios , taking into account investors' risk tolerance , loss aversion, and other behavioral factors.

Retirement Planning

Behavioral finance can inform retirement planning by helping individuals recognize and overcome biases that may hinder their ability to save adequately, invest wisely, and make appropriate decisions regarding pensions and annuities .

Risk Management

Incorporating behavioral finance into risk management can help organizations and individuals identify and address biases that may lead to excessive risk-taking or underestimating potential risks.

Market Efficiency and Pricing

Understanding the impact of behavioral biases on market efficiency and asset pricing can help investors, financial professionals, and policymakers develop strategies to mitigate market inefficiencies and improve overall market stability.

Behavioral Economics and Public Policy

Behavioral finance insights can be applied to public policy initiatives, such as designing pension systems, promoting financial literacy , or implementing regulations that protect investors from the consequences of irrational decision-making.

Critiques and Limitations of Behavioral Finance

Overemphasis on biases and irrationality.

Critics argue that behavioral finance may overstate the prevalence and impact of cognitive biases and emotional influences, leading to an overly negative view of human decision-making abilities.

Difficulty in Quantifying Behavioral Factors

Quantifying the effects of behavioral biases on financial decision-making and market outcomes can be challenging, making it difficult to develop precise models or to measure the effectiveness of interventions designed to address these biases.

Potential for Misuse

The insights of behavioral finance could be misused by financial professionals or organizations seeking to exploit individuals' cognitive biases and emotional tendencies for their own benefit.

Challenges in Integrating Behavioral Finance With Traditional Finance

Integrating behavioral finance insights with traditional finance models and practices can be complex, as it requires reevaluating long-held assumptions and developing new tools and frameworks.

Behavioral finance is an interdisciplinary field that combines psychological theories with conventional economic and financial theories to understand the impact of cognitive biases and emotions on financial decision-making.

The key concepts in behavioral finance, such as bounded rationality, heuristics, prospect theory, mental accounting, and biases like overconfidence, confirmation bias, and loss aversion, highlight the irrational financial choices people make, deviating from the assumptions of traditional finance models.

Behavioral finance is crucial for investors, financial professionals, and policymakers as it provides valuable insights into the psychological factors influencing financial decisions, ultimately improving financial outcomes and market efficiency.

By studying market anomalies, researchers and practitioners can better understand the impact of cognitive and emotional factors on asset pricing and investment decision-making.

However, critics argue that behavioral finance may overstate the prevalence and impact of cognitive biases and emotional influences, and integrating behavioral finance insights with traditional finance models and practices can be challenging.

Nonetheless, behavioral finance insights can be applied to personal finance, corporate finance, retirement planning, risk management, and public policy initiatives, leading to better financial decision-making and improved investment outcomes.

Behavioral Finance FAQs

What is behavioral finance.

Behavioral finance is a field of study that combines psychology and finance to understand how individuals and groups make financial decisions and how their behavior affects financial markets.

What are some common biases studied in behavioral finance?

Some common biases studied in behavioral finance include anchoring bias, confirmation bias, overconfidence bias, and loss aversion bias.

How does behavioral finance differ from traditional finance?

Traditional finance assumes that individuals are rational and make decisions based on available information. Behavioral finance recognizes that individuals are prone to cognitive biases and emotions that can influence their decision-making.

How can behavioral finance concepts be applied in investment management?

Investment managers can use behavioral finance concepts to understand better how investors make decisions and to develop investment strategies that account for behavioral biases. For example, they can use prospect theory to design investment portfolios that minimize the impact of loss aversion.

What are some criticisms of behavioral finance?

Critics of behavioral finance argue that it overemphasizes the role of psychology in financial decision-making and overlooks the importance of rational analysis. Some also argue that it is difficult to test behavioral finance theories empirically.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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Behavioral Finance

Financial Psychology

Reviewed by Psychology Today Staff

Behavioral finance is the study of how psychology affects investor behavior and financial markets. The study of behavioral finance relies on the assumption that investors and other financial decision-makers do not always behave rationally and instead often make choices based on cognitive biases or emotional responses; in turn, researchers in the field study how psychological and emotional forces can shape financial markets at scale.

Though the field tends to examine financial decision-making through a market-based lens, some of its lessons can apply to individuals trying to make sense of their own financial decision-making. A related field, financial psychology, looks more closely at the cognitive, social, and emotional factors that affect individuals’ relationships with money.

• Biases in Behavioral Finance
• How Psychology Affects Our Financial Decisions

Traditional economics operates on the assumption that individual actors are always able to practice self-control and make decisions that best promote their own self-interest. Starting in the 1970s, researchers Daniel Kahneman and Amos Tversky—credited with creating the field of behavioral economics —turned that idea on its head, publishing work demonstrating that real-world decisions are often based on limited information, biases and imperfect mental shortcuts (known as heuristics ), and heightened emotion .

Researchers in the field of behavioral finance, a subset of behavioral economics, are interested in how these biases and emotional responses affect financial decisions specifically, and how these choices in turn affect broader markets. It accepts that financial decisions are often irrational and may be heavily influenced by individual investors’ mindsets and mental health—for example, research has found that an increase in anxiety reduces investors’ willingness to bear financial risk .

Biases that are of particular interest to behavioral finance researchers include familiarity bias , in which investors are more likely to invest in what is familiar as opposed to what is unfamiliar; loss aversion , in which investors place a higher priority on avoiding loss than they do on making gains; and confirmation bias , in which investors seek out and remember information that confirms their already-held beliefs about a specific investment.

Humans tend to follow the crowd and base their decisions on what others are doing, and financial decisions are not immune from this herd mentality (also called herd behavior or herd instinct). Investors who fall prey to this bias may base their decisions to buy or sell on what they see others doing, rather than what is rational. In extreme cases, herd mentality can lead to stock market crashes or other serious, widespread financial consequences.

Mental accounting, first proposed by economist Richard Thaler, refers to the human tendency to mentally budget our money into different “accounts” and to use them to make financial decisions, even if those decisions are irrational. For example, someone who has gone over their mental budget for groceries may choose to stop buying groceries but continue to spend money on other, less critical “accounts,” like clothing—an irrational choice because the money is being spent either way.

Money plays a significant role in our day-to-day lives, and having money, or lacking it, can have surprising effects on emotions, mental health, and relationships. Just like investors and others whose behavior influences large financial markets, the choices that we as individuals make about money may not be entirely rational: We may spend money impulsively or make frivolous purchases, or we may change our spending habits when upset or anxious—or even when we’re joyful. Insights from both behavioral finance and the related field of financial psychology—which looks at the various factors that influence people’s day-to-day financial decisions—can help us better understand our relationship with money and perhaps spend it more wisely.

Emotions—especially negative ones like fear , anxiety , and insecurity—can trigger irrational or impulsive spending; indeed, advertisers may intentionally trigger these emotions to encourage consumers to buy. Recognizing one’s triggers and developing strategies to respond to them—for example, waiting 24 hours before following through on an impulsive purchase—can help someone control emotional spending and better manage their finances in the long term.

Financial issues can be a significant source of stress in romantic and family relationships. Lacking money can lead to anxiety and shame , which can trigger conflicts or cause people to withdraw from relationships. Disparities in wealth, particularly between siblings or romantic partners, can lead to feelings of inadequacy or guilt . These outcomes are not guaranteed, however, and open communication about money and the emotions that surround it can help couples or families navigate challenges while keeping their relationships strong.

Whether money can really buy happiness has been long debated in the field of psychology. Research does suggest that more money is generally associated with increased happiness—but the relationship is not universal, and some findings suggest that there may be a limit to how much happiness wealth can provide. In general, money itself is likely not the key to happiness; rather, it can be a means to other valuable resources, like time and peace of mind, that do lead to improved well-being.

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Behavioral Finance

It is the study of human behavior in a financial context.

Previously a Portfolio Manager for MDH Investment Management, David has been with the firm for nearly a decade, serving as President since 2015. He has extensive experience in wealth management,  investments and portfolio management .

David holds a  BS  from Miami University in Finance.

Prior to accepting a position as the Director of Operations Strategy at DJO Global, Manu was a management consultant with  McKinsey  & Company in Houston. He served clients, including presenting directly to C-level executives, in digital, strategy,  M&A , and operations projects.

Manu holds a PHD in Biomedical Engineering from Duke University and a BA in Physics from Cornell University.

• What Is Behavioral Finance?
• Understanding Behavioral Finance
• Traditional Vs. Behavioral Financial Theories

Behavioral Finance Concepts

• Biases Revealed By Behavioral Finance

Impact On Decision-Making

What is behavioral finance.

Behavioral finance, as the term implies, is the study of human behavior in a financial context. Human beings are imperfect relative to the conditions assumed for most financial theories. This is why their behavior creates anomalies within the financial markets .

This discipline of finance intends to explain why people behave the way they do and the impact of their behavior on the market as a whole. 

It can give us some insight into the causes behind suboptimal behaviors and help plan remedial actions to reduce their negative impact on the financial well-being of individuals.

Behavioral finance is a specialized class of finance. It deals with individuals' psychological and emotional characteristics that make them deviate from standardized theories of rationality. Such behavior is often responsible for the individual's financial detriment.

Exhibiting behavior of this kind is deemed an anomaly for traditional financial theorists. It is also seen as a cause for disruption in the markets' normal proceedings leading to market imperfections.

It is important to study why such anomalies exist and how their impacts can be managed. Knowledge in this regard may help attain more financially favorable conditions and decisions.

Understanding behavioral finance

It wasn't until the late 1970s that people started to question the soundness of financial theories.  Richard Thaler ,  Amos Tversky , and  Daniel Kahneman  were the pioneers who put forth the idea. They believed that standard finance bases its concepts on assumptions unattainable in the real world.

They suggested using psychology to explain anomalous financial behaviors of individuals. Their findings showed how human beings are normal instead of rational. But, unfortunately, this normality makes them quite prone to making errors of judgment. 

They use mental shortcuts and let their emotions get in the way of optimal decision-making.

The efficient market hypothesis states that stock prices reflect all information. The information may or may not be publicly available, and no market participants can outperform the market. This cannot be true.

In the unlikely event that all market investors have the same information, they would still perceive and interpret it differently. Their decisions, as a result, would be different, and the uniformity principle of the EMH will become void.

The stock market crash is an irrefutable example of how unnatural it is to assume the EMH to function in the real world.

Behaviorists intend to explain the causes of such behavioral anomalies. Such explanations can help provide mitigating strategies so that individuals become aware and do not fall prey to these cognitive or emotional traps.

Traditional vs. Behavioral Financial Theories

Standard theories of finance and economics have always tried to fit the world into their mold of perfection. They expect that markets, securities and commodities, and even humans will conform to the principles of perfect information, perfect rationality, and perfect self-interest.

It is easier for financial models to work by assuming all conditions to be perfect. The alternative would be having to tailor already complex concepts according to each whim of the human brain.

Behaviorists defined the term "Bounded Rationality." It explains behavior that is less than optimal. For example, decisions made using heuristics result from bounded rates. Likewise, those affected by emotions and impulses fall under bounded rationality. 

All these lead to unfavorable outcomes. It assumes that humans are not rational but have bounded rationality. They make decisions in the presence of various psychological, social and emotional factors to the best of their ability.

Traditional theories of finance assume:

• The market and investors to always be rational.
• Investors are self-serving, and their decisions are based on material gain only.
• Investors can exercise perfect self-control.
• Investors' information processing is free of any cognitive or emotional biases.

Behavioral finance assumes:

• Investors are normal and not rational
• Investors are emotional beings who cannot make cold and calculating decisions
• Investors have different psychological traits that hinder their decision-making processes
• Investors often use mental shortcuts to make decisions

Behavioral finance allows for individuality in investors. It acknowledges that all human beings are different in their cognitive abilities, in their thoughts and feelings about things, and in the way they process information.

The reasons for imperfect behavior by individuals or investors in marketplaces are all driven by either cognitive or emotional factors. These are termed behavioral biases. 

Biases can be defined as unfair inclinations of an individual toward a certain decision that cannot be backed by logic but has roots in the individual's psychological traits.

These biases are studied in depth by a major part of the field of this finance. It tries to explain their causes and the kinds of impact they may have on the decision outcomes.

There are two kinds of biases.

• Cognitive biases; 
• Emotional biases

Cognitive biases arise due to errors in cognition or understanding of the information or a situation in which a decision is to be made. Emotional biases arise due to human impulses. These, when not controlled adequately, hinder decision-making.

The foundation of economic and financial theory is the presumption that people will make informed decisions and behave rationally and that markets will function effectively. However, it is not usually the case.

Behavioral finance explains an investor's illogical actions. Strongly embedded prejudices that are deeply ingrained in our psyche are the cause of these erroneous actions. These biases are divided into cognitive and emotional categories.

Biases Revealed by Behavioral Finance

The following is a list of the most commonly observed biases that investors may be vulnerable to. 

Understanding these biases can help them make more informed decisions by remaining wary of these faulty behaviors.

1. Overconfidence Bias

Overconfidence is when an individual begins to overly accredit himself for previous successful financial endeavors. 

As a result, he becomes more confident in his ability or talent to make such decisions and less cautious than he should otherwise be.

Such behavior is termed overconfidence bias and can often lead to reckless decisions with negative outcomes.

2. Mental Accounting

People tend to divide the money they have into mental accounts. They base these divisions on their origin, whether earned or gotten as a refund or won in the lottery.

For instance, money earned is to be budgeted and utilized, while that from a lottery can be freely spent.

No matter where it comes from, money needs to be allocated responsibly. However, giving in to such tendencies may lead to irrational investments and spending behaviors.

3. Illusion Of Control Bias

The illusion of control bias can be understood as an extension of the overconfidence bias. So it is when people assume they have more control over a situation than they do. 

This inflated sense of control can lead to misguided risk assessments and harm the financial well-being of an individual.

4. Familiarity Bias

People gravitate to situations, places, and even people like themselves or to whom they can relate. 

Such a bias can cause an individual to only invest in stocks of companies they know of or in their own country. This could lead to under-diversification in their portfolios, making them assume greater risk than they should.

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5. Confirmation Bias

Individuals tend to accept new information when it confirms their beliefs. And less likely when it contradicts them. This selective bias in undertaking information is called confirmation bias. 

Being biased in information about an investment decision can hurt the investor, as they do not consider all available information before doing so. They may leave out essential bits that could alter their entire perspective about an investment.

6. Availability Bias

is also sometimes called recency bias. Investors prone to availability bias tend to let recent events overshadow future ones. They expect similar trends to continue as before. 

For example, a market boom can leave investors optimistic about price growth. However, such optimism may cause them to become risk-seeking while making investments, believing their returns would continue to grow.

The financial crisis of 2008 followed a bleak view of the stock market, causing many investors to stop trading altogether.

It is important to note here that each high follows a low and vice versa; that is how the market operates.

7. Hindsight Bias

People often claim to have predicted a certain outcome after it has come to pass. However, they realize in hindsight that they knew what would happen. 

Such notions are misguided and prompt the question of why they didn't act if they knew beforehand what would happen.

Further, this bias makes people blind to their mistakes, hence their ability to learn from them and take remedial action.

8. Self-Attribution Bias

Self-attribution is a behavior where an investor is likely to attribute all his successful endeavors to his intrinsic knowledge, skills, or abilities. At the same time, any suboptimal outcomes are blamed on external factors.  

It is also known as self-serving bias. This behavior can also stem from undue overconfidence that the investor may have about his knowledge or skills relative to others.

9. Representative Bias

Representative bias is a mental shortcut used to process information seemingly more efficiently. It makes them think two things or events are more alike than they are, so they start to expect similar outcomes.

This causes them to make irrational decisions.

Vigilant information gathering and processing can help avoid such a bias and consequent decision blunders.

10. Framing Bias

Investors can be vulnerable to interpreting the same information differently when worded in the frame of gain or loss. This prevents them from objectively assessing the underlying situation and making faulty decisions based on the presented information.

A closer analysis of given information can allow for better decisions and outcomes.

11. Anchoring Bias

While researching, individuals anchor themselves to the first information they find. Therefore, each finding is compared to the first to make information processing easier.

In this approach to the research process, individuals miss out on chunks of relevant information. Moreover, it sets an inappropriate standard for judging all later information. This results in a biased interpretation of the situation.

12. Loss Aversion

As the term indicates, an investor tends to avoid realizing losses at all costs. Investors become far more concerned about not incurring a loss than realizing gains. 

As a result, they make decisions based on the sentiments associated with bearing a loss. This behavior can cause them larger than anticipated losses.

The disposition effect is a phenomenon that takes place when investors exhibit loss aversion. It is when they sell profitable investments sooner than is appropriate, fearing that those gains might disappear. 

And postpone selling any losing investments longer than is rational in hopes that the price will bounce back and the investor would at least break even , if not make a profit off it.

13. Herd Behavior

Herd behavior is a universal psychological trait. It causes people to do what others are doing and often jump in without a second thought. 

In the event of a loss, herd behavior makes investors believe they share that loss with others who made the same choice. This makes them feel that the loss hurts less than it would have. Otherwise, they were the ones against the crowd.

Studies show that people find it harder to go against the crowd. Even when their instincts point that way, they find it easier to stifle their instincts.

Herd behavior is very common in the stock market. It often causes dramatic trends in buying and selling.

14. Gambler's fallacy

Gamblers fallacy refers to investors' perception that causes them to assume a trend's reversal. This is quite comparable to what a gambler could experience at a casino.

If the die has been landing on black numbers during recent turns of the roulette wheel, the player will make his bets on a red number in the hopes that the pattern will change. 

Similarly, people often think that a stock failing for a while would see a trend reversal, becoming a solid buy.

Behavioral finance attempts to understand how emotions and cognitive flaws affect investors' decision-making processes. This finance differs from conventional wisdom because it holds that not all financial decisions are made with complete reason.

According to conventional financial theories, people should carefully weigh risk and return considerations before making investment decisions to maximize their earnings and minimize losses. 

The classic financial theory is contested by behavioral finance, which contends that various biases influence investors' investing choices. 

These include regret aversion, framing, and disposition effect as developed by prospect theory, as well as heuristic biases like anchoring, representativeness, the gambler's fallacy, and more.

The decision-making process of any investor can be subject to one or more of the biases discussed above. The presence of all these biases and heuristics disrupts  optimal decision-making . And in the process, investors incur unprecedented losses.

It is thus important to learn about biases. First, figure out what biases we're most likely to exhibit and plan strategies to ensure we do not fall prey to them.

To summarize, better financial decisions can be made by;

• Conducting careful research before making each decision.
• Understanding biases, their causes, and their effects.
• Preventing behavioral traps.
• Prioritizing financial well-being over personal feelings about investments.

The field of behavioral finance has grown to be well-respected. Many of its supporters think this finance will become so integrated into conventional economics and business in the upcoming years that the difference won't even be necessary.

Since the economic theory of rational agents can no longer be upheld, real advancement in the field of economics requires the addition of research findings from the behavioral and psychological sciences. 

Even though human conduct occasionally seems irrational, systemic deviations from pure reason can be modeled and examined. As a result, advisors and wealth managers can outperform the competition by adopting behavioral finance and making smarter decisions.

This finance offers a rationale for investors' utterly irrational financial decisions. Moreover, it illustrates how emotions and cognitive biases influence investors' decision-making. 

Anchoring, overconfidence, herd behavior, and loss aversion are a few factors contributing to behavioral finance.

 In essence, this approach looks into investor behavior patterns and aims to comprehend how these patterns influence investing choices. 

It provides a framework for assessing active investing methods for investors and gives numerous insightful perspectives for investment professionals. 

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Reviewed and edited by Parul Gupta |  LinkedIn

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What Is Behavioral Finance?

Hint: It’s more than cataloging behavioral biases.

When you think of the subject “Behavioral Finance,” your mind might veer toward behavioral biases. You might think of herding behavior and the role it played in meme stocks and the chaos of Silicon Valley Bank’s demise. Or you may think of recency bias and how it contributed to people losing money by cashing out at the market lows in 2008 or 2020.

Behavioral biases are an important part of behavioral finance, but they are far from the sole focus of the subject. Instead, behavioral finance is the study of how real people make real decisions about their money in real environments, all of which are imperfect.

What Does It Mean to Make a Rational Financial Decision?

In short, it’s complicated.

One might think the most rational financial decision is the one that maximizes a person’s profits, but that may not always be the case.

In the literature on the topic, there are competing views on what makes a rational choice, with some models only focusing on maximizing a person’s expected utility, others incorporating the influence of social preferences and reference points, and others considering our inherent limitations when making decisions. What this all comes down to is that it’s not easy to denote what the most rational choice is, and it can depend on other things besides strictly objective matters.

Take, for example, a person’s decision to pay off student loans right out of college instead of investing for retirement. When looking at this decision from a dollars-and-cents perspective, this is an irrational choice—if the interest rate on the loan is below 7%, this person is losing money by not investing. However, let’s take a closer look at this scenario. Say this person is expecting to have to take time off work soon, thus needing to minimize short-term regular debt payments to make ends meet. Or, let’s say this person can’t sleep at night because of the weight of the student loans. In these cases, the most “rational” thing to do is pay the loans and postpone retirement savings.

Shortcuts Aren’t So Bad—It’s Biases You Need to Look Out For

Given the complexity of rationality, you can see how our minds have their work cut out for them. Making the “right” decision seems like trying to shoot a moving target. Here’s where the study of behavioral finance comes into play.

In our research, we explore how people grapple with financial decisions. For example, part of behavioral finance includes the study of heuristics —because we are dealing with so many decisions on a daily basis, all with their own layers of complexity, our minds take shortcuts, where we only consider some of the available information to make a decision. Most of these shortcuts actually work out very well for us, but some do lead us to the wrong conclusions and actions.

That’s when these shortcuts turn into biases —those well-known and discussed slipups of the human mind that now make up much of people’s interpretation of behavioral science.

What’s Next for Behavioral Finance

Learning about the shortcuts our minds take when making decisions is really only part of behavioral science. Instead, the field focuses more broadly on why people make the decisions they make and how we can positively influence their behavior.

In recent years, the field has doubled-down on making research findings practical and impactful. This increased scrutiny in the world of behavioral finance can be seen as a way of making this once-budding subject into a more rigorous field of study.

For financial advisors and investors, this is good news: It means more actionable insights one can use when making financial decisions. Below are some examples of behavioral finance insights we’ve produced that can help investors and advisors make better decisions.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies .

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Tuesday , March 26, 2024

How behavioral finance impacts your money decisions

Psychological influences – such as emotions and biases – impact how a person thinks, behaves and makes decisions. It’s likely that these influences, both conscious and subconscious, impact nearly every aspect of your life – including how you spend, save and invest your money. The study of how these influences impact investors’ decision-making is known as behavioral finance.

This guide takes a closer look at what behavioral finance is and how understanding the influence these factors have on your investment decisions can help improve your overall investment strategy.

What is behavioral finance?

Behavioral finance is the study of how psychological influences, such as emotions like fear and greed, as well as conscious and subconscious bias, impact investors’ behaviors and decisions. It removes the misconception that investors always make rational decisions that are in their best interest. It acknowledges that emotions and biases can impact investing decisions, even if it goes against a person’s own self-interests.

Behavioral finance and the stock market

The efficient market hypothesis (EMH) makes the assumption that the price of securities, such as stocks, already factors in all known information about that security. This hypothesis holds the belief that while individual investors may not always act rationally, the stock market as a whole is always right. On the contrary, the study of behavioral finance believes that external factors, such as greed, fear, anger and bias, also contribute to stock prices and market fluctuations.

Behavioral finance is such an influential factor impacting the stock market that the Security and Exchange Commission has a dedicated team studying its impact. Understanding how these factors impact the stock market can help you make investment decisions that are based on the most relevant facts and not just your gut instincts or emotions.  

Understanding behavioral economics

As an investor, it’s valuable to explore how various emotions and biases may impact your investment decisions. The reality is that we all have biases, whether conscious or unconscious, that affect the way we think, act and behave. It only makes sense that these factors could influence what choices you make when it comes to investing.

While it’s impossible to remove all types of emotions and biases, you can learn more about these factors and how they influence not just your thought process but investment markets as well. This type of understanding can help you identify outside factors that may influence your investment decisions and encourage you to take a closer look at other factors, such as facts and data, before making  investment decisions.

The 5 behavioral finance concepts

There are many psychological influences that impact your behaviors and decision-making, but the vast majority of these factors can be broken down into one of the following five behavioral finance concepts.

Mental accounting

Mental accounting is a behavior where investors place different values on various forms of money and investments. For instance, an investor may place more value on paying off their mortgage than contributing to long-term investments. This type of thinking can cause investors to make financial decisions that are counterintuitive to their interests.

Herd behavior

Herd behavior is the practice of following the actions of a group of people despite the lack of a clear plan or vision. In finance, it occurs when investors make rash investment decisions based solely on the behaviors of other investors. In many cases, investors make these decisions despite not understanding the drivers behind these trends. Herd behavior can lead to fast-paced sell-offs or rallies. Unfortunately, in some cases, this type of investment practice can also lead to significant losses.

Emotional gap

Have you heard the old phrase that the only two factors driving the investment markets are fear and greed? These two factors along with other powerful emotions, such as anger and excitement, can indeed have an extreme impact on an investor’s decision-making process.

These factors, known as the emotional gap, can cause investors to make irrational decisions based on their emotions rather than focus on hard facts and professional advice. For example, an investor’s desire to "get rich quick" can cause them to make risky investments for a promise of fast returns. On the other hand, fear can prevent investors from making sound investment decisions or entice them to prematurely sell off assets at the first sign of trouble.

Anchoring is the subconscious practice of relying solely on assumptions when making investment decisions. According to Herbert Simon , a leading behavioral economist, investors often use heuristics – or mental shortcuts – when making complex or difficult investment and financial decisions. Rather than focus on facts and data, investors use past experiences and general rules to make assumptions regarding investments.

For example, an investor may assume that when a stock performs well over the last 5 years, it will continue to perform well in the future. Without also looking at other factors that may impact the stock’s performance, the investor’s assumption may not hold true. On the other hand, an investor may fail to take advantage of a promising investment opportunity due to a bad experience with a similar investment.

Self-attribution

Self-attribution occurs when an investor is overconfident in their investment knowledge and abilities. This type of investor often takes all the credit when an investment performs well but steers the blame away from themselves when an investment underperforms. For example, if an investor purchases stock that suddenly increases in value, the investor takes all the credit for the outcomes of this decision despite not using any facts or insights when making this purchase. If, on the other hand, this stock suddenly takes a downward turn, the investor may blame it on bad luck rather than themselves.

Self-attribution can be dangerous because it can lead investors to make rash decisions based solely on gut instincts. Investors who become overconfident without ever evaluating previous investment mistakes could end up losing significant amounts of money.

Behavioral finance biases

Emotions aren’t the only factor impacting investors’ decisions. Both conscious and subconscious biases also influence how investors make decisions. While studies show that there are over 180 cognitive biases 1 that impact the way we think and make decisions, there are four primary types of behavioral finance biases.

Confirmation bias

Confirmation bias occurs when an investor quickly accepts any information that aligns with their own personal beliefs as a fact. Due to this type of bias, investors are more likely to believe that this type of information is correct without any facts or data to support it. Confirmation bias can also make investors less likely to accept facts that go against their already-held beliefs. This bias could entice you to select underperforming investment options or fail to determine when the right time to sell is.

Experiential bias

Experiential bias is when investors make investment decisions based primarily on past events. Investors believe that current events are likely to have similar outcomes and, therefore, base their investment decisions on this information. While using historical data can be beneficial when making investment decisions, there are many other factors that you need to consider. Recency bias is a similar factor that occurs when investors choose their investment options based on current trends. This also can be a dangerous practice because many trends are short-lived.

For example, during the recession of 2008, many investors sold off their stocks in anticipation of a stock market crash. While the stock market definitely saw turbulence during this timeframe, it technically never crashed and saw a recovery in a little over a year.

Loss aversion

Loss aversion can be a particularly strong bias, especially for new investors. It occurs when an investor focuses more on the potential losses attached to an investment instead of focusing on the gains they may potentially make. As an investor, it’s important to set your own risk level, but you can’t let the potential risks involved hinder your ability to properly assess each investment you are considering.

Familiarity bias

Familiarity bias occurs when investors tend to focus primarily on investment options that they are already familiar with, such as money market funds, CDs or domestic stocks. This might be a good strategy for some new investors, but over time, it’s important to develop a diversified investment portfolio.

What is an example of behavioral finance?

One way to fully understand the impact behavioral finance can have on your investment decisions is to take a look at an example.

Let’s say that someone files a major lawsuit against a company you currently invest in. Your experiential bias tells you that similar events spur a significant drop in stock prices. Based on this information, you’re likely to sell your stock as quickly as possible to minimize your losses. Even if you decide to hold onto this stock for a while, the influence of herd behavior may entice you to follow many other investors' leads and sell your stock, even at a loss.

However, basic research could show that the lawsuit is likely a ploy by the plaintiff to reach a higher settlement with the company. If you only use your emotions and biases to determine when the right time to sell your stock is, you could end up losing money on your investment. If, on the other hand, you hold your stock until the parties reach a settlement, you may see better outcomes. In this scenario, the investor would have had better outcomes if they would have researched the reasons for the lawsuit before making assumptions. 

It’s important to understand how your emotions and personal biases can impact your investment choices. With this understanding, you can take steps to minimize the effect these influences have on your decision-making process and maintain focus on your long-term plan.

Try to maintain a long-term focus. If you look at why individual investors haven't done as well as the indices, it's because of emotional mistakes – selling at the wrong time, being fearful, doing things that we wouldn't normally do if we weren't scared.

Now is a good opportunity to go back to who you are as an investor, which is your risk tolerance. How much volatility can you stomach?

Control what you can. Make sure that you build a strategy that you’re comfortable with. The best strategy for any investor is the one that they stay in.

You can exert control through better diversification and portfolio rebalancing. And this can make a difference when we experience market volatility.

Consider meeting with a financial professional who can provide you with guidance to make more informed investment decisions.

1 World Economic Forum, “24 cognitive biases that are warping your perception of reality,” November 2021.

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Your finances could benefit from a springtime refresh. It lets you check in on goals and the progress you’re making, and you can also save money for rainy days.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. No part of this blog, nor the links contained therein is a solicitation or offer to sell securities. Compensation for freelance contributions not to exceed $1,250. Third-party data is obtained from sources believed to be reliable; however, Empower cannot guarantee the accuracy, timeliness, completeness or fitness of this data for any particular purpose. Third-party links are provided solely as a convenience and do not imply an affiliation, endorsement or approval by Empower of the contents on such third-party websites. 

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What Is Behavioral Finance?

People are driven by unconscious biases and other influences, behavioral finance proposes that irrational choices can explain market trends. It then becomes essential to explore why investors make decisions that don’t follow logical thinking and may end up hurting them in the long run.

What are the branches of behavioral finance?

• There are several types of behavioral finance and many factors that influence financial decisions, including overconfidence, familiarity bias, hindsight bias and more. 

When analyzing why individuals do or do not invest , it’s important to remember that people may follow an irrational process. Some people may choose to avoid a certain fund because they are unfamiliar with the company. If someone feels like they have a lot to lose, they may also succumb to loss aversion and avoid taking a chance. At the other end of the spectrum, investors may flock to a stock because they are buoyed by overconfidence when they see the initial stock price.

Multiple types of behavioral finance can guide investors down a specific path, so it’s crucial for people to understand the various biases that can control outcomes. These behavioral finance biases include:

• Overconfidence , or the profound belief in results accomplished in small sample sizes
• Familiarity bias , or the primary reasoning of an investment being that one is interested or involved in a particular company
• Hindsight bias , or the belief that a past investment result will be repeated in a future investment
• Naive diversification , or investing in a numerous amount of funds without targeted reasoning
• Belief perserverance , or the refusal to accept new information when making investment decisions.

How is behavioral finance different from traditional finance?

• While traditional finance focuses on the market, behavioral finance factors human behavior into the equation.

Traditional finance assumes that markets are efficient and that it’s impossible to predict how stock prices will change. As a result, this method homes in on market behavior and financial models. 

Meanwhile, behavioral finance shifts the focus toward human emotions, which has led to the growth of emotion AI technology in finance. This discipline argues that people make irrational decisions and that markets respond to these decisions. For example, believers in conscious consumerism may invest in a company to stay true to their sense of justice. Behavioral finance considers these kinds of choices, revealing how human thinking can alter market results.

What are the benefits of behavioral finance?

• Understanding the principles of behavioral finance can help investors avoid mistakes and make smarter decisions.

To gain financial independence, investors need to exercise the independent thinking that comes with behavioral finance. When investors are aware of the power emotions can have in decision-making, they’ll be better equipped to avoid making decisions based on fear. Keying in on behaviors enables investors to discover patterns, making it easier to predict how people and markets will behave in similar situations. By becoming aware of emotions, investors can manage their own emotions and navigate everyday challenges, such as confirmshaming techniques . Behavioral finance then gives investors the tools to better care for their financial and personal well-being.

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The Personal Essay: Tell About Yourself The audience for your "personal essay" is an admissions committee composed of members of your future profession or academic discipline. When they read your essay, they will be seeking depth and substance, along with a true passion and commitment to your area of study. They will also be looking for individual traits or characteristics that make you an outstanding graduate or professional school candidate.

Personal Statements or Statements of Purpose can include some level of the following information:

• Convey your long- and short-range career goals
• Present yourself as an individual with desirable personal abilities, background, interests and plans
• Describe the nature and significance of your relevant experiences, and give concrete evidence of your knowledge, competence and motivation in the field of your choice
• Explain your special interest in this particular program/field
• Account for any conspicuous weaknesses in your record
• Demonstrate your writing ability and communication skills in general

How to Get Started It is imperative that you conduct a thorough self-assessment of your interests, motivations and career goals before you begin to write. Consider these questions about your own abilities, background, interests and plans:

• Why do I want to pursue a graduate or professional school program?
• What are the special features, approaches, or values of this particular program or field of study?
• How do my interests, values, strengths, experiences, ambitions and plans relate to what this program offers? Why do I want to be a part of this program or profession? What would I bring to this program or profession?
• What is my interest and motivation in this field? What have I gotten out of it so far and what do I hope to get out of it? Can I trace my interest and motivation to any concrete experience?
• What are my strengths related to this field, personal, academic, and experiential?
• What experiences demonstrate my competence and motivation in this field?
• Do my relevant experiences fall into any pattern? Broad exploration? Increasing focus? Tackling greater and greater challenges?
• What kinds of experiences have taught me the most?

Writing Tips Here are some general tips to help you write an effective personal essay:

• Before you put pen to paper, make lists of information that may be pertinent to the admissions decision. Lists may include professors, courses, books, research projects, ideas, travel, and other experiences that have been important. You should also list work, extracurricular and volunteer activities, special skills, honors and awards.
• Give yourself plenty of time. Start thinking about your essays early. The admissions committee reads essays thoroughly and carefully. Make sure you've given it your best effort.
• Be sure to read the essay question(s) on the application carefully. What information, approach or emphasis is the question asking for? Make sure you answer all questions and address issues outlined.
• Although you may formulate a general essay in advance, make certain that each application contains an essay which specifically answers the questions asked by that school. For centralized applications there is typically one broad statement and then a set of secondary application essays that follow that are particular to the school. If you are applying through a centralized application system, be sure to not be school-specific in the general personal statement that goes to all schools.
• Your spirit, character and uniqueness should come through but your writing should be formal and correct.
• Each school-specific essay should contain at least a sentence or two which tells why you have chosen that particular institution. Does it have an excellent specialization in your area of interest? Is there a particular faculty member with whom you expect to work? Is the program recommended to you by a faculty member?
• Strive for a strong opening line or paragraph. Look for something beyond the predictable, something that demonstrates the qualities that set you apart from other candidates.
• Specific knowledge, skills and insights acquired through internships and other work experiences--paid or volunteer, and related to your proposed field of study--are particularly strong material.
• Any experience that demonstrates interpersonal talents, entrepreneurial skills, ability to perform under stress, unusual background, some important lessons learned, or a genuine commitment to a worthy cause could be appropriate if you demonstrate the relevance.
• Draft! Draft! Draft! Good writing is writing that is easily understood. Have one good writer critique your essays, and another proofread them.

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Sorry, there are no results matching your search., the impact of behavioral data on transformation success.

Gain real-time insights into employee behavior at scale by using AI for effective change management in business transformation.

Understanding and predicting employee behavior is fundamental to any successful business transformation. It's not just about gauging employee sentiment – having a pulse on how staff members feel about change – but rather, about understanding their behaviors and how these adapt in response to new strategies or shifts in business direction.

Recognizing the importance of a behavior-centric approach to business transformation is vital. Focusing on behavior measurement aids in navigating complex changes, identifying effective strategies, and pinpointing areas for adjustment in real time, thereby reducing disruptions. It not only expedites transformation but assures sustainability by cultivating effective, repeatable change management processes. Realizing the significance of behavior measurement is key to enhancing innovation, accelerating cultural shifts, and achieving strategic goals successfully.

Five steps for using behavioral data effectively:

• Establish behavior alterations correlating directly with transformation objectives. 
• Develop a baseline for existing sentiment and behaviors.
• Implement continuous behavior measurement and analysis, pinpointing areas of progress or difficulty.
• Refine strategies to eliminate obstacles and enhance transformation programs.
• Communicate regularly with employees, acknowledging achievements and highlighting areas for improvement.

Download our paper to learn how companies can align behavior with transformation goals.

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Top 10 Personal Brand Statement Examples To Follow

Updated: March 11, 2024

Published: June 18, 2023

In a 2022 personal branding trends study, most respondents said they consider personal branding an essential component of work and their everyday life. 

It found that 75% of Americans trust someone with a personal brand, and 63% are likely to buy from someone with a personal brand. 

As an entrepreneur who is always on the lookout for customers or potential investors, you know that trust is key. Developing a personal brand for yourself can be an effective tool to help grow your business.

What is a personal brand statement?

A personal brand statement is a couple of sentences that highlights your unique skills and experience. It’s meant to be a quick introduction to people who discover you online because it summarizes what you can offer them.

Basically, it’s a catchphrase, tag line, or elevator pitch for you as a professional individual. While it showcases what you do professionally, you can also display your personality.

Why leaders should have a personal brand statement

You make a better first impression.

As the saying goes, “You only have one shot to make a first impression.” The challenge for entrepreneurs is that you don’t always know when that opportunity arises, as many first impressions happen online.

When a potential client or investor hears about you, their first instinct is to look up your social media profiles. If you’ve got a clear and well-thought-out personal brand statement, you’ve got a better chance at making them stick around for second and third impressions.

You can establish yourself as a thought leader

Thought leadership is a powerful content marketing tactic that can help you reach bigger audiences and generate leads for your business. When you’re known as a leader in your particular industry, that automatically gives you a higher level of credibility. 

A personal brand statement can strengthen your thought leadership strategy by clearly stating your area of expertise.

You can create networking opportunities

Whether you’re looking for top talent, new clients, or potential investors, networking is half the battle. 

Personal brand statements make it easy for potential connections to understand exactly what you do and what you value. Without it, you may miss out on opportunities simply because they didn’t know that you had something relevant to offer them.

Best personal brand statement examples for leaders

“bilingual creative who lives at the intersection of business & design.” —chris do.

Source: Chris Do’s LinkedIn page .

Chris Do is a multi-hyphenate: a designer, creative strategist, public speaker, founder, and CEO of The Futur, an online education platform.

What makes it great : Because he wears so many hats, Do’s personal branding statement is better than trying to explain everything he does.

“Helping people find their zen in the digital age.” —Shama Hyder

Source: Shama Hyder’s homepage .

Shama Hyder is the founder and CEO of Zen Media, a marketing and PR firm. She’s also written a book about digital marketing .

What makes it great : Hyder’s brand statement is an attention-grabbing play on her company’s name and showcases one of her key values: making clients feel a sense of calm in a fast-paced digital world.

“Write better sales emails faster with our in-inbox coach.” —Will Allred

Source: Will Allred’s LinkedIn page .

Will Allred is the co-founder of Lavender, an AI-powered email software startup.

What makes it great : Brooklin Nash, CEO of Beam Content, shares, “In one sentence, Allred captures the entire focus of his social presence: to help salespeople write better emails faster while demonstrating his authority and sharing his product in the second part of that headline.”

“Keeping it awkward, brave, and kind.” —Brené Brown

Source: Dr. Brené Brown’s homepage .

Brené Brown has a Ph.D. in sociology and is the author of several books that cover topics like shame, vulnerability, empathy, and courage.

What makes it great : Dr. Brown’s personal brand statement embodies her mission statement of encouraging people to embrace their vulnerabilities by sharing her own.

“Empowering ridiculously good marketing.” —Ann Handley

Source: Ann Handley’s homepage .

Ann Handley is a digital marketing expert and bestselling author. Her company helps marketers get tangible results.

What makes it great : Sharon Jonah, creative director and founder of digital marketing agency Buzz Social, shares, “In four words, we understand what Handley does, how she does it, whom she’s speaking to, and how she speaks.”

“Still just a girl who wants to learn. Youngest-ever Nobel laureate, co-founder @malalafund and president of Extracurricular Productions.” —Malala Yousafzai

Source: Malala Yousafzai’s Twitter profile .

Malala Yousafzai is the youngest Nobel laureate and an activist whose fund aims to remove the barriers to female education around the world.

What makes it great : Her bio highlights her impressive achievements with language that makes her sound relatable. 

“Marketing. Strategy. Humanity.” —Mark Schaefer

Source: Mark Schaefer’s homepage .

Mark Schaefer is an educator, speaker, marketing consultant, and author. He’s developed corporate marketing strategies for brands like Microsoft, IBM, and AT&T.

What makes it great : “It’s subtle, concise, and creative. It describes what Schaefer does, what he focuses on, and his unique and distinguished approach,” says Omer Usanmaz, CEO and co-founder of mentoring and learning software Qooper. 

“Empowering successful women to take control of their finances.” —Jennifer Welsh

Source: Jennifer Welsh’s LinkedIn profile page .

Jennifer Welsh founded Money School, a digital course that teaches women about personal finance. What makes it great : Welsh’s strong personal brand statement says exactly what she does and whom she does it for. 

“Let’s make Excel the solution, not the problem.” —Kat Norton (Miss Excel)

Source: Miss Excel’s homepage .

Kat Norton (known as Miss Excel) became famous on TikTok for her bite-sized Microsoft Excel tutorials. She now offers Excel courses on her website.

What makes it great : Norton’s clever statement shows that she understands her audience's problem and highlights her personality.

“‘The Customer Whisperer.’ I help marketers discover the hidden reasons why customers buy so they can become un-ignorable.” —Katelyn Bourgoin

Source: Katelyn Bourgoin’s LinkedIn page .

Katelyn Bourgoin is a creator and serial entrepreneur who founded a branding agency, a mentoring platform for female entrepreneurs, and a restaurant consulting firm. She trains entrepreneurs to uncover what makes their products “un-ignorable.”

What makes it great : Bourgoin’s clever branding statement effectively tells marketers that she can help them understand their customers better and make their brands memorable.

How to write a personal brand statement

Writing an effective personal brand statement can be tough because it requires you to be catchy yet compelling. It should give audiences all the necessary information in a sentence or two.

Here are some tips for writing your own:

Think about your unique value proposition

A unique value proposition (or unique selling point) is what makes you different. It tells people why they should try your product or service, network with you, or invest in your business.

Tip : Identify your core values, goals, and strengths.

If you don't know what those are, ask yourself:

• Why am I building my brand?
• What do I want my audience to know me for?
• How do I do things differently?
• Do I have a distinct skill set, experience, point of view, or passion?
• What value do I bring to my audience?

Keep it short and sweet

Your brand statement should be simple and easy to understand. 

The goal is to have someone look at your profile or website and immediately understand who you are and what you do, so keep it brief. Keep in mind that you don’t need full sentences either. 

Start by writing one to three sentences that outline what you do, for whom, and how you do it. You can also add a sentence about values. 

Then, look at different ways you can shorten them. Or pick out the most specific and impactful words and see what happens when you simply list them. 

Showcase your personality

Injecting your personality empowers you to share what you do without being bland or boring. Being authentic also helps attract like-minded customers, investors, and peers. 

At the end of the day, there are other people out there who may offer similar services or solve the same problems for your target audience. Your personality can set you apart.

“Don't be afraid to inject a bit of humor, quirkiness, and passion. It’ll help make you more memorable and help you stand out from the crowd,” says Usanmaz.

Ideally, you want customers to know what you do and get a little taste of what it will be like to work with you.

A personal brand statement conveys your mission, differentiates you from competitors, and attracts your target audience. Use these tips and real-life examples of personal brand statements to inspire you to write your own.

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Mustafa Suleyman, DeepMind and Inflection Co-founder, joins Microsoft to lead Copilot

Mar 19, 2024 | Microsoft Corporate Blogs

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Satya Nadella, Chief Executive Officer, shared the below communication today with Microsoft employees.

I want to share an exciting and important organizational update today. We are in Year 2 of the AI platform shift and must ensure we have the capability and capacity to boldly innovate.

There is no franchise value in our industry and the work and product innovation we drive at this moment will define the next decade and beyond. Let us use this opportunity to build world-class AI products, like Copilot, that are loved by end-users! This is about science, engineering, product, and design coming together and embracing a learning mindset to push our innovation culture and product building process forward in fundamental ways.

In that context, I’m very excited to announce that Mustafa Suleyman and Karén Simonyan are joining Microsoft to form a new organization called Microsoft AI, focused on advancing Copilot and our other consumer AI products and research.

Mustafa will be EVP and CEO, Microsoft AI, and joins the senior leadership team (SLT), reporting to me. Karén is joining this group as Chief Scientist, reporting to Mustafa. I’ve known Mustafa for several years and have greatly admired him as a founder of both DeepMind and Inflection, and as a visionary, product maker, and builder of pioneering teams that go after bold missions.

Karén, a Co-founder and Chief Scientist of Inflection, is a renowned AI researcher and thought leader, who has led the development of some of the biggest AI breakthroughs over the past decade including AlphaZero.

Several members of the Inflection team have chosen to join Mustafa and Karén at Microsoft. They include some of the most accomplished AI engineers, researchers, and builders in the world. They have designed, led, launched, and co-authored many of the most important contributions in advancing AI over the last five years. I am excited for them to contribute their knowledge, talent, and expertise to our consumer AI research and product making.

At our core, we have always been a platform and partner-led company, and we’ll continue to bring that sensibility to all we do. Our AI innovation continues to build on our most strategic and important partnership with OpenAI. We will continue to build AI infrastructure inclusive of custom systems and silicon work in support of OpenAI’s foundation model roadmap, and also innovate and build products on top of their foundation models. And today’s announcement further reinforces our partnership construct and principles.

As part of this transition, Mikhail Parakhin and his entire team, including Copilot, Bing, and Edge; and Misha Bilenko and the GenAI team will move to report to Mustafa. These teams are at the vanguard of innovation at Microsoft, bringing a new entrant energy and ethos, to a changing consumer product landscape driven by the AI platform shift. These organizational changes will help us double down on this innovation.

Kevin Scott continues as CTO and EVP of AI, responsible for all-up AI strategy, including all system architecture decisions, partnerships, and cross-company orchestration. Kevin was the first person I leaned on to help us manage our transformation to an AI-first company and I’ll continue to lean on him to ensure that our AI strategy and initiatives are coherent across the breadth of Microsoft.

Rajesh Jha continues as EVP of Experiences & Devices and I’m grateful for his leadership as he continues to build out Copilot for Microsoft 365, partnering closely with Mustafa and team.

There are no other changes to the senior leadership team or other organizations.

We have been operating with speed and intensity and this infusion of new talent will enable us to accelerate our pace yet again.

We have a real shot to build technology that was once thought impossible and that lives up to our mission to ensure the benefits of AI reach every person and organization on the planet, safely and responsibly. I’m looking forward to doing so with you.

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Chick-Fil-A backtracking from its decade-old ‘no antibiotics ever’ pledge because it can’t acquire sufficient supplies of antibiotic-free chicken

The fast-food chain Chick-Fil-A backtracked from its decade-old “no antibiotics ever” pledge intended to help prevent human antibiotic resistance linked to the rampant use of the drugs in livestock production.

Instead, the company  said in a statement  that it will embrace a standard known as “no antibiotics important to human medicine,” often abbreviated as NAIHM, which entails the avoidance of medications commonly used to treat people and limits the use of animal antibiotics to cases of actual animal illness.

Livestock producers have long used antibiotics to boost rapid weight gain in animals such as chickens, pigs, cows and sheep, improving the profitability of their businesses. Over the past decade, however, many nations, including the United States, have begun to restrict the practice as evidence mounted that it was contributing to drug resistance and reducing the effectiveness of antibiotics against disease in humans.

Chick-Fil-A said it will begin shifting to the new policy in the spring of 2024. A company spokesman added that the move reflects company concerns about its ability to acquire sufficient supplies of antibiotic-free chicken. One of the poultry industry’s largest companies, Tyson Foods , said last year that it was reintroducing some antibiotics to its chicken production and removing its “No Antibiotics Ever” package labeling. It began to eliminate antibiotics from some of its poultry production in 2015.

In a May 2023 video featured on the  Tyson Foods YouTube channel , Tyson’s senior director of animal welfare, Karen Christensen, described the shift as “based on scientific research and industry learnings.” She noted that Tyson planned to begin using antibiotics known as ionophores, which don’t play a role in human medicine, to “improve the overall health and welfare of the birds in our care.” Ionophores have long been used to promote growth in livestock.

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Press Release

Sec charges two investment advisers with making false and misleading statements about their use of artificial intelligence.

FOR IMMEDIATE RELEASE 2024-36

Washington D.C., March 18, 2024 —

The Securities and Exchange Commission today announced settled charges against two investment advisers, Delphia (USA) Inc. and Global Predictions Inc., for making false and misleading statements about their purported use of artificial intelligence (AI). The firms agreed to settle the SEC’s charges and pay $400,000 in total civil penalties.

“We find that Delphia and Global Predictions marketed to their clients and prospective clients that they were using AI in certain ways when, in fact, they were not,” said SEC Chair Gary Gensler. “We’ve seen time and again that when new technologies come along, they can create buzz from investors as well as false claims by those purporting to use those new technologies. Investment advisers should not mislead the public by saying they are using an AI model when they are not. Such AI washing hurts investors.”

“As more and more investors consider using AI tools in making their investment decisions or deciding to invest in companies claiming to harness its transformational power, we are committed to protecting them against those engaged in ‘AI washing,’” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “As today’s enforcement actions make clear to the investment industry – if you claim to use AI in your investment processes, you need to ensure that your representations are not false or misleading. And public issuers making claims about their AI adoption must also remain vigilant about similar misstatements that may be material to individuals’ investing decisions.”

According to the SEC’s order against Delphia, from 2019 to 2023, the Toronto-based firm made false and misleading statements in its SEC filings, in a press release, and on its website regarding its purported use of AI and machine learning that incorporated client data in its investment process. For example, according to the order, Delphia claimed that it “put[s] collective data to work to make our artificial intelligence smarter so it can predict which companies and trends are about to make it big and invest in them before everyone else.” The order finds that these statements were false and misleading because Delphia did not in fact have the AI and machine learning capabilities that it claimed. The firm was also charged with violating the Marketing Rule, which, among other things, prohibits a registered investment adviser from disseminating any advertisement that includes any untrue statement of material fact.

In the SEC’s order against Global Predictions, the SEC found that the San Francisco-based firm made false and misleading claims in 2023 on its website and on social media about its purported use of AI. For example, the firm falsely claimed to be the “first regulated AI financial advisor” and misrepresented that its platform provided “[e]xpert AI-driven forecasts.” Global Predictions also violated the Marketing Rule, falsely claiming that it offered tax-loss harvesting services, and included an impermissible liability hedge clause in its advisory contract, among other securities law violations.

Without admitting or denying the SEC’s findings, Delphia and Global Predictions consented to the entry of orders finding that they violated the Advisers Act and ordering them to be censured and to cease and desist from violating the charged provisions. Delphia agreed to pay a civil penalty of $225,000, and Global Predictions agreed to pay a civil penalty of $175,000.

The SEC’s Office of Investor Education and Advocacy has issued an Investor Alert about artificial intelligence and investment fraud.

The SEC’s investigations were conducted by Anne Hancock, HelenAnne Listerman, and John Mulhern under the supervision of Kimberly Frederick, Brent Wilner, Corey Schuster, and Andrew Dean with the Division of Enforcement’s Asset Management Unit. Ragni Walker, Thomas Grignol, and Peter J. Haggerty of the Division of Examinations and Roberto Grasso of the Division’s Office of Risk and Strategy assisted with the investigations.

More About This Topic

• Video - SEC Chair Gary Gensler on AI Washing
• Video - SEC Enforcement Director Gurbir Grewal on AI Washing

Related Materials

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Va. Democrats promote budget bill in statewide tour of their own

PORTSMOUTH, Va. — After blasting Gov. Glenn Youngkin for turning his beef with the General Assembly’s budget bill into a campaign-style statewide tour , Democrats hit the road themselves Monday to sell Virginians on what’s in their spending plan.

Leading House and Senate Democrats kicked off the three-day “Virginia Families First” tour, which will take them from Hampton Roads to the D.C. suburbs, the state capital and the Tennessee line. Senate Finance and Appropriations Committee Chairwoman L. Louise Lucas (D-Portsmouth) acknowledged that they were campaigning, too — but in a way she said was different from the barnstorming by Youngkin (R), who flirted with a 2024 presidential bid and is widely thought to still have national ambitions.

“We’re campaigning for the families of Virginia; that’s what we’re doing right now,” she said after the kickoff Monday morning at a downtown Portsmouth event space. “We’re campaigning on the issues that are important to them. He’s running for public office, whatever that might be.”

Youngkin has held several campaign-style events after the Democratic-controlled legislature passed a budget bill on March 9 without some of his highest priorities, including tax cuts and language to authorize a publicly financed $2 billion arena for the Washington Capitals and Wizards. Labeling it a “backward budget,” Youngkin told a suburban Richmond audience on March 14 that the Democrats’ goal is “taxing you more … and spending on pet projects.”

Youngkin said at that appearance that he had not had enough time to review all of the budget’s components to say whether he would consider vetoing the budget in its entirety — a point Democrats seized on Monday. The General Assembly will reconvene April 17 to consider Youngkin’s amendments and vetoes.

“If you have not had enough time, why go out and campaign and call our budget a backwards budget?” said House Appropriations Committee Chairman Luke E. Torian (D-Prince William). “When you propose a 1 percent salary increase for state employees and our teachers — what kind of salary increase is that? We have listened to the citizens of the commonwealth, and we’re proposing a 3 percent increase to hard-working families.”

Asked about the Democrats’ tour at an unrelated bill-signing event in Richmond on Monday, Youngkin said he hopes they are open about the tax increases included in the bill.

“I hope that they’re being transparent with everyone about the tax increases,” Youngkin said, according to a transcript provided by his office. “Families can’t afford tax increases, and they shouldn’t have to in a commonwealth where we don’t need them. As I said, we can, in fact, invest in education and law enforcement and behavioral health and we do not need to raise taxes and Virginians shouldn’t see their taxes go up.”

Youngkin’s proposed budget would have increased the state sales tax and extended it to digital downloads for consumers. He would have offset those increases by cutting personal income taxes, which the lawmakers did not do. The General Assembly also extended the digital sales tax to software purchased by businesses — not just consumers, as the governor had wanted — and applied the revenue to raises for teachers and state employees, K-12 schools and higher education, and government services.

On a tour that will take them to Richmond, Manassas, Fairfax County, Roanoke and Abingdon on Tuesday and Wednesday, Democrats plan to play up aspects of the budget that they think will be popular, including higher spending on K-12, higher education and mental health. On the tour’s second stop, they visited Eastern State Hospital in Williamsburg. Torian said he was impressed by how clean and well-maintained the state psychiatric facility was. The visit emphasized the critical nature of mental health funding, he said.

“We need to make sure that money is kept in the budget,” Torian said. Facilities such as Eastern State “do not need to suffer as a result of the governor not supporting the budget … we have sent to him.”

The budget passed the House 62-37, with 11 Republicans joining every Democrat in favor of it, and passed the Senate 24-14, with three Republicans joining every Democrat in support and two Republicans not voting. Democrats said Youngkin has been childish — “He’s doing what spoiled brats do when they can’t get what they want,” said Sen. Mamie E. Locke (Hampton) — and unproductive by belittling a bill with bipartisan support as “backward.” Their own rhetoric was sharp, however.

“We put over $40 million in for school resource officers, 3 percent teacher pay raises,” said state House Speaker Don L. Scott Jr. (D-Portsmouth). “We did all of that, and for him to continue to try to characterize that as anything other than a responsible, bipartisan budget is really disappointing, and it’s amateurish and it shows that he doesn’t know how to work and play well with others.”

Gregory S. Schneider contributed to this report.

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