Behavioural Finance and Investment Decision Making: Understanding the Psychology Behind Market Choices

Abstract

This study explores the intersection of psychology and financial decision-making through the lens of behavioural finance, challenging the traditional notion of investor rationality embedded in classical financial theories. While conventional models assume markets are efficient and investors act logically, behavioural finance reveals that emotional, cognitive, and social factors significantly influence investment decisions. The purpose of this research is to identify and analyse key behavioural biases such as overconfidence, loss aversion, herd mentality, anchoring, and mental accounting and their impact on individual and institutional investment behaviours. Employing a qualitative-descriptive research design, this study reviews relevant literature, real-world case studies, and psychological theories to highlight how these biases contribute to market anomalies and suboptimal decisions. The findings suggest that behavioural factors not only distort investor judgment but also affect market dynamics in measurable ways. Furthermore, the study evaluates mitigation strategies including financial education, regulatory frameworks, and the integration of technology such as robo-advisors. By understanding the behavioural underpinnings of investment choices, this research underscores the need for a more psychologically informed approach to financial decision-making and policymaking. Behavioural finance challenges the traditional assumptions of investor rationality in classical finance theories by integrating psychological insights into financial decision-making. This article explores the fundamental concepts of behavioural finance and its implications on investment behaviour, highlighting cognitive biases such as overconfidence, anchoring, herd behaviour, and loss aversion. By evaluating empirical studies and theoretical models, the article identifies how psychological factors often lead to suboptimal investment decisions. It also discusses strategies to mitigate these biases, such as nudges, financial education, and technology-based advisory tools. This study aims to bridge the gap between rational financial models and the reality of human behaviour in investment decisions.