A good and simple example is given by Fromlet

One funda workforcetal notion in the pay and economic fields with regards to decision making has continuously been ground on the underlying assumption that individuals or decision making agents atomic number 18 rational and intention. However, in many cases, rationalistic explanations have failed to upshot major monetary occurrences in the past.A good and simple example is precondition by Fromlet (2001), In 2001 the Swedish currency the crown- was seriously undervalued in the foreign exchange grocery despite the fact that Swedish economy enjoyed a good economic growth record, had the lowest inflation rate among the 12 European Monetary jointure members, surplus government budget and a good, positive balance of payment position. Thus in this case all the rationalistic theories could not adequately exempt the weakening of the crown given the fact that all economic indicators showed that it should be stronger.According to many theorists, even though realism screwnot be at tained, a good hypothetic model should include mechanisms that help in relaxing as much assumptions as possible to attain a near realistic through empirical observation based theory. Most of the traditional and neoclassical pecuniary theory such as the capital asset pricing model (CAPM) and expected utility theory (EUT) are based on the unreal assumptions that can be explained as Representative agents and players in the financial market 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 market given time will settle on an equilibrium point and that the equilibrium price reflects the real value of the asset that can rationally be explained employ traditional theories (Ideal or rationally explained equilibrium) (Thaler, 1999).Behavioral pay is a relatively new field of study that has made tremendous progress in the attempt to answer these unrea listic assumptions and offer an alternative explanation of the financial market. Behavioral finance holds that the market is unrealistic due to the human 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 versatile from fathers and mothers, ho drug abusehold, spouses, students, businessmen, government leaders etc. are all decision runrs in the financial market thus the assumption of rationality as provided by these theories is unrealistic (Ritter, 2003). These paper 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 excessivelyl in the financial market.Definition and description of behavioral finance. Behavioral finance is an empirically based theory, Behavioral finance theorists argue that to understand the performance 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 well-nightimes information inefficient and participants do not often make decision rationally.Behavioral finance uses to main concepts namely cognitive psychology and limits to arbitrage. cognitive psychology as utilize in behavioral finance focuses on behavioral factors influencing investors decision making or how people think it postulates that investors make systematic errors in the manner they think and this contributes to irrationality in decision making. For instance, some investors might be overconfident and end up loosing due making investment decision based on this behavioral trait.This cognitive biases lead to irrational decision and can explain the weaknesses of classical financi al 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 irrationality in the financial market.This paper will highlight the cognitive biases by combining some of the documented behavioral patterns 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 extent that an individual can make decisions due to several behavioral patterns (Fromlet, 2001) 1/n Heuristics or regulation of thumb. Heuristics or the rule of thumb is one common behavioral technique applied in decision making.According to the definition (as quoted in Fromlet, 2001), heu ristic means use of experience and practical efforts to answer questions or to improve performance. Heuristics mean fast, selective variant of information, determined to a high extent by intuitiontaking into account that the conclusions may not give the desired results because of the velocity and/or the rawness in the decision-making. This technique makes it easier for investors since information in the market usually spreads faster, changes often and has become more complicated to interpret. Therefore, given various options many investors use the 1/n rule by spreading their funds equally 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 have to assimilate and use the information as fast as they can to take advantag e of the market, some result to heuristic approach. This sometimes leads to suboptimal results and explains the difference 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 testify collected in their research 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 put there retirement savings. Overconfidence and preference for certain information. some other pattern that manifests itself and lead to irrationality in decision making in the financial market is overconfidence.Ritter (2003), notes that entrepreneurs break away 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 that it leads overconfident entrepreneurs tend to limit their options by no t 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 research by Bernard and Odeon (2001 as quoted in Ritter 2003) that the more men on average perform worse than women and this is partly attributed to the fact that they are overconfident than women.