A good and simple example is given by Fromlet

One fundamental notion in the pay and economic fields with regards to decision reservation has always been establish on the underlying assumption that individuals or decision making agents ar sagacious and heading. However, in umpteen faux pass, rationalistic translations decl ar failed to act study financial occurrences in the past.A unplayful and simple congresswoman is given everywhere by Fromlet (2001), In 2001 the Swedish currency the crown- was seriously undervalued in the foreign replacement mart despite the particular that Swedish economy enjoyed a good economic growth record, had the lowest inflation rate among the 12 European M nonpareiltary union members, surplus government budget and a good, positive balance of payment position. Thus in this case all the rationalistic theories could not adequately explicate the weakening of the crown given the fact that all economic indicators showed that it should be stronger. concord to many theorists, even though real numberity give the bouncenot be get throughed, a good theoretical model should include mechanisms that serving in relaxing as much assumptions as possible to attain a near realistic empirically ground theory. Most of the traditional and neoclassical financial theory such as the capital addition pricing model (CAPM) and expected utility theory (EUT) are base on the unrealistic assumptions that can be explained as Representative agents and players in the financial trade are rational therefore base their decisions with the objective of maximizing wealth therefore asset pricing reflect the real value of the asset at any particular time (Thaler, 1999). The grocery given time will settle on an equilibrium organize and that the equilibrium price reflects the real value of the asset that can rationally be explained using traditional theories (Ideal or rationally explained equilibrium) (Thaler, 1999).Behavioral finance is a relatively new field of study that has made trem inte rceptous go along in the attempt to answer these unrealistic assumptions and offer an alternative explanation of the financial market. Behavioral finance holds that the market is unrealistic due to the homosexual element therefore, in evaluation of financial market decision making and market condition, financial theories should recognize the role of human behavior in financial assets price determination.The composition of financial investors is diverse from fathers and mothers, ho engrosshold, spouses, students, businessmen, government leadership etc. are all decision makers in the financial market thus the assumption of rationality as provided by these theories is unrealistic (Ritter, 2003). These report is an in depth evaluation of the behavioural theory and its application in the financial market. The paper will look at the strength and weaknesses of behavioral finance in an attempt to show its applicability as a in additionl in the financial market.Definition and descripti on of behavioral finance. Behavioral finance is an empirically based theory, Behavioral finance theorists argue that to understand the carrying into action and decision making in market, it important to integrate psychological and behavioral variables and classical financial theories in decision making and market atmosphere. According to this theory, the market is sometimes information inefficient and participants do not much make decision rationally.Behavioral finance uses to main concepts namely cognitive psychology and strangles to arbitrage. cognitive psychology as applied in behavioral finance focuses on behavioral factors influencing investors decision making or how multitude think it postulates that investors make systematic errors in the manner they think and this contributes to unreason in decision making. For instance, some investors might be confident and end up loosing due making investment decision based on this behavioral trait.This cognitive biases lead to irra tional decision and can explain the weaknesses of classical financial theories with regards to why the market fails to attain equilibrium or conceptual expectation of rational investor decision in the financial market. (Ritter, 2003). Cognitive biases. Cognitive psychologists hold that there several cognitive biases that affect investors decisions in the market, as mentioned this biases lead investors to make systematic errors hence explaining unreason in the financial market.This paper will highlight the cognitive biases by combining some of the documented behavioral frames in arguing the case and behavior finance model case in the financial market it should be noted that psychological patterns and behavior categories as presented are interlinked to the finish that an individual can make decisions due to several behavioral patterns (Fromlet, 2001) 1/n Heuristics or rule of thumb. Heuristics or the rule of thumb is one common behavioral technique applied in decision making.Accord ing to the exposition (as quoted in Fromlet, 2001), heuristic means use of experience and practical efforts to answer questions or to improve performance. Heuristics mean fast, selective interpretation of information, determined to a high extent by intuitiontaking into account that the conclusions whitethorn not give the desired results because of the velocity and/or the incompleteness in the decision-making. This technique makes it easier for investors since information in the market usually spreads faster, changes oftentimes and has become more complicated to interpret. Therefore, given various options many investors use the 1/n rule by spreading their funds as or proportionately on the available options since it is easier than choosing the rational option based on the information hence introducing irrationality in the market in terms of decision making.A good example is if in a given financial market six different economic indicators are published, economists and investors h ave to assimilate and use the information as fast as they can to take advantage of the market, some result to heuristic approach. This sometimes leads to suboptimal results and explains the oddment between the ideal classical financial market of a rational investor and the real world. (Fromlet, 2001 and Ritter, 2003).Thaler (1999), argue that from empirical evidence collected in their look for most individuals investing for retirement have little or no knowledge of the financial market hence uses the rule of thumb or 1/n heuristic approach to make decisions on where to throw away there retirement savings. Overconfidence and preference for certain information. Another pattern that manifests itself and lead to irrationality in decision making in the financial market is overconfidence.Ritter (2003), notes that entrepreneurs tend to be overconfident and hence invest too much in stocks or options that they are familiar with. This can be termed as an irrational tendency to the extent t hat it leads overconfident entrepreneurs tend to limit their options by not diversifying their portfolio hence irrational since they tie up their assets (for example real estates) to the company they are familiar with partly due to the fact that they would feel in control of local familiar stocks compared to high returns stocks that are outside their control, this is referred to as control illusions.A good example world over is the fact that most workers tend to invest too much in the company they work for and this has led to loss of entire savings to many of the companies in the event of insolvency (see Ritter, 2003 pg. 434 for examples). Furthermore, it was noted that generally, men are more overconfident than women and this behavior extends to investment decisions. It was found out in a explore by Bernard and Odeon (2001 as quoted in Ritter 2003) that the more men on second-rate perform worse than women and this is partly attributed to the fact that they are overconfident than women.