What Is the Difference between Rational and Psychological Factors in Options Pricing?

Rational factors are quantifiable, measurable inputs in pricing models like the Black-Scholes model, such as the underlying asset price, strike price, time to expiration, risk-free rate, and implied volatility. Psychological factors are non-quantifiable elements like fear, greed, herd behavior, and loss aversion.

While models rely on rational inputs, psychological factors influence the implied volatility input, thus indirectly affecting the final price.