Investor Behavior: A Guide to Understanding Financial Decisions
Author : Dr. Rajkumar Nagarwal and Dr. Mahesh Chand Meena
Abstract :
Behavioural finance seeks to understand the psychological factors influencing investor behaviour, challenging the traditional economic assumption of rational decision-making. Unlike classical finance theories that assume investors are fully rational and always aim to maximize utility, behavioural finance incorporates cognitive biases, emotions, and social influences into its models to explain anomalies in financial markets. This paper explores key behavioural finance concepts such as overconfidence, loss aversion, herd behaviour, and mental accounting, which significantly impact investor decisions. By examining empirical evidence and theoretical frameworks, the study highlights the divergence between rational theories and actual investor behaviour. Understanding these behavioural patterns is critical for improving financial decision-making, designing better financial products, and developing policies that promote market stability. The research also discusses strategies to mitigate the adverse effects of biases on investment choices, emphasizing the role of financial education and awareness in fostering more disciplined and rational financial behaviour. Ultimately, this paper contributes to the growing body of literature that seeks to bridge the gap between psychology and economics in financial decision-making.
Keywords :
Behavioural finance, investor decision-making, cognitive biases, loss aversion, overconfidence, herd behaviour, mental accounting, financial markets, psychology and economics, financial education.
