What is the main focus of behavioral finance?

The main focus of behavioral finance is to examine the psychology behind investor behavior and cognitive biases. This field combines insights from psychology and economics to understand how emotional and psychological factors influence investors' decisions and market movements. Behavioral finance explores various cognitive biases, such as overconfidence, loss aversion, and herd behavior, which can lead to irrational market actions that deviate from the expected outcomes of traditional financial theory that assumes rational behavior.

By understanding these psychological influences, behavioral finance seeks to provide explanations for market anomalies that cannot be easily accounted for by conventional financial models. This understanding helps investors and analysts to make more informed decisions and potentially improve their investment strategies.

In contrast, the other choices focus on different aspects of finance. Studying the impact of market regulations addresses the legal and structural influences on the market, while developing algorithms pertains to quantitative analysis and technology rather than behavioral factors. Calculating financial ratios is a key aspect of traditional financial analysis, which does not directly engage with the psychological elements that behavioral finance focuses on.