What area does behavioral finance study?

Behavioral finance is specifically focused on understanding how psychological factors influence the decisions that investors make. This area of study explores how cognitive biases, emotions, and social influences can lead to irrational behaviors in financial markets. For instance, it examines phenomena such as overconfidence, loss aversion, and herd behavior, all of which can significantly impact investment choices and market outcomes.

Other areas mentioned, such as the effects of political events or statistical analysis of market trends, fall outside the scope of behavioral finance. While these may be related topics within the broader field of finance, they do not specifically address the psychological aspects that drive investor behavior. Similarly, comparing past and current economic policies pertains more to economic analysis rather than the individual decision-making processes that behavioral finance investigates. Thus, the correct answer emphasizes the core of behavioral finance, which is its focus on the psychological influences that affect investors.