Prospect Theory: Behavioral Finance and Decision-Making in Investing

Why do we often hold onto losing investments too long while selling winners too early? Traditional economic models assume investors are completely rational, but behavioral psychology tells a very different story. This course introduces you to Prospect Theory, the framework that explains how real people actually evaluate risk and make financial decisions. You will learn to recognize the hidden psychological patterns that lead to costly trading mistakes and discover how to build a disciplined, objective approach to managing your portfolio. What you'll learn: - Understand the foundational concepts of Prospect Theory, including value functions and reference points. - Analyze how loss aversion causes investors to take irrational risks to avoid realized losses. - Identify common cognitive biases in modern trading, such as the disposition effect and mental accounting. - Apply practical frameworks to neutralize emotional decision-making in your own portfolio. - Evaluate investment opportunities using objective risk-reward metrics rather than emotional impulses. The course begins with core definitions and the fundamental psychology of risk, moving systematically from cognitive theory to practical written exercises that help you identify your own behavioral blind spots. Designed for beginner investors, traders, and finance enthusiasts who want to understand the psychology of market behavior, this guide requires no prior economics background. Read through these lessons to master the mental side of investing.