This diagram shows two line graphs. One line represents real S&P Composite stock price index and other line is the ex post rational price of S&P index. Here p shows the actual price and p* is the estimated price using a dividend discount model. First observation is that the actual price is very volatile as compared to the estimates prices. The upward movement and downward movement are very strong. This means that when the markets start to rise there is a large difference between the estimated price and the actual price and similar conclusion can be drawn from the graph when there is a downward movement. In the graph between the period of 1910 and 1930 the US economy was going through the Great Depression. During this period it can be seen that the S&P index fell by a large amount i.e. the market crashed. The investors reacted very badly to the news and thus the market fell. However according to the graph of the ex post rational price the fall should be very small during the period of crisis. This difference can be seen in the rise of the markets too after the period of 1950. The markets rose to new high levels but the price suggested by the rational theory did not suggest that the market should rise to such new high levels.There are many implications which can be explained behavioural finance theory. This part of the market psychology can be explained with the help of the human nature and this paper aims to achieve that. It will look at the different behavioural finance theories, what they propose and how these theories can be linked to explain these deviations in the actual asset price of an asset mainly stocks. Behavioural finance has been used to understand how the investors react to losses and gains in the stock market. It proposes that the investors in the market are not rational and hence the standard economic theories are unable to explain the movement in the stock market. These theories do not take into consideration the human aspects and hence are insufficient to explain the movements in market. Sometimes even small news may result into large selling of the stock while good news may not result into buying of that same stock.