Behavioral Finance: How Behavioral Biases Affect Investment Behavior
Author : Namrata Kalwani
Abstract :
Traditional financial theory attempts to explain the process of making financial decisions based on the rationality of the market and its participants. Traditional financial theory mentions that markets and investors are rational; investors have perfect self-control, and are not confused by cognitive errors or information processing errors. However, investors, especially veterans, behave irrationally because unintentional decisions are influenced by state of mind, emotions, trading theory, beliefs, and interpretation of information. Behavioral biases influence the actual process of decision making of investment decisions rationality is not often used in investment decisions. One of the key aspects of behavioral finance studies is the influence of psychological biases finance it can be analyzed to understand different outcomes across a variety of sectors and industries. Some common behavioral financial aspects include loss aversion, consensus bias, and familiarity tendencies. When most of the economic theories fail of explain the investment decision and the bubble in the US market then this theory comes into play to. Businesses using the combination of traditional and behavioral finance theories to generate effective client management strategies are increasing. This paper seeks to explore the influence of emotional, psychological, cognitive, and social factors on the financial decision-making of individuals and organizations.
Keywords :
Behavioral finance, investment decisions, decision theory, investment bias, prospect theory, heuristic decision making
