The risk management in financial industry has been evolved in past two decades. The financial industry translated it from a return driven industry to a robust risk management industry. The scope of risk management has been widened from controlling to measuring and determining its limits. The factors which affect the risk in financial industry are broadly classified into systematic risk, market risk, credit risk, liquidity risk, and operational risk. Generally financial institutions are more exposed to credit risks in comparison of other risks. There are certain models which help in ascertaining the credit risk in a financial institution in order to identify the risk taking ability of particular financial institution and management thereof. The mostly used techniques for risk management are GAP (Groupe d'Analyse Pratique) analysis, VaR (Value at Risk), RAROC (Risk Adjusted Rate of Return or Capital), Securitization, Sensitivity Analysis, and Internal Risk Based Rating. These all models of risk management are based on the assumption that individuals are rational and free from the social and behavioral biases. The present paper is an attempt to do systematic literature review (SLR) of existing published work on behavioral finance’s applications in risk management. The various studies conducted on behavioral finance in risk management across the globe have been considered in the present paper to explain concepts and to highlight the limitations of rational risk models.

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Keywords: Behavioral Finance, Financial Literacy, Risk Management, Risk Analysis.

JEL Classification:  G2, G4, G53