Behavioral finance has emerged a vital area for interpreting irregularities in financial markets that traditional economic theories often struggle to explain. This research explores how behavioral finance contributes to the understanding and identification of anomalies such as speculative bubbles, market crashes and discrepancies from the expectations of market efficiency. Central to this investigation is an analysis of cognitive distortions, emotional factors and heuristic driven judgments that influence investor actions and financial decision making. The study critically evaluates the limitations of the The Efficient Market Hypothesis (EMH) implies that investors behave rationally and that markets represent all available information. Contrary to this assumption, real world evidence frequently illustrates irrational investor behavior and inconsistent market responses. Prospect theory, mental accounting, and herd behaviour are among behavioural finance theories that might help us understand these departures from rationality. The paper further explores how these theories help explain pricing anomalies like momentum effects, overreactions and underreactions in financial assets. In doing so it underscores the role of psychology in shaping market dynamics and challenges the view that markets are always efficient. More over the study considers the practical applications of behavioral insights in areas such as financial regulation and investment decision making, suggesting that these principles can be employed to manage risk more effectively and enhance market resilience. Furthermore, the study investigates recent breakthroughs in the industry, such as the use of artificial intelligence and big data technologies to better measure investor mood and behaviour patterns. These technological tools offer promising avenues for improving market predictions and decision support systems. The conclusions stress the importance of embedding behavioral finance principles into financial education policy development and portfolio management strategies. By doing so stakeholders can build more adaptive and informed financial environments. Ultimately This study adds to the expanding body of literature that bridges the gap between traditional finance theories and behavioural sciences, providing important insights for academics, business practitioners, and policymakers alike.