Paper Details
A study on Behavioral Finance: How do psychological factors affect investment decisions and market outcomes
Authors
M. Annapurna
Abstract
Behavioral finance integrates insights from psychology and economics to understand how psychological factors influence investment decisions and market outcomes. Traditional finance assumes investors are rational and markets are efficient, but behavioral finance challenges this by examining how cognitive biases and emotions impact financial behaviors. Overconfidence leads to excessive trading and risk-taking, while anchoring biases investors to irrelevant information, like past prices. Herd behavior creates market bubbles and crashes, as investors follow the crowd rather than rational analysis. Loss aversion causes investors to hold onto losing investments and sell winners too soon, and prospect theory explains how people value gains and losses differently.
These biases contribute to market inefficiencies, anomalies, and increased volatility. For instance, the dot-com bubble and the 2008 financial crisis were driven by irrational exuberance and panic selling, exacerbated by herd behavior and overconfidence. Behavioral finance provides insights into these irrational behaviors, offering strategies to mitigate biases and improve decision-making. By understanding these factors, investors can develop more effective strategies that align with market dynamics, enhancing long-term investment outcomes and contributing to stable and efficient markets.
Behavioral finance highlights the importance of psychology in financial decision-making, challenging traditional assumptions and offering a more comprehensive understanding of market behavior. Awareness of these biases and disciplined strategies can help investors navigate volatility and capitalize on opportunities. Education and research-based decision-making are crucial for countering irrational behaviors and improving overall financial outcomes. Behavioral finance continues to evolve, providing valuable insights that can inform better investment practices and contribute to a more stable financial environment.
Keywords
Behavioral finance, psychology, emotions, market inefficiencies, market anomalies.
Citation
A study on Behavioral Finance: How do psychological factors affect investment decisions and market outcomes. M. Annapurna. 2024. IJIRCT, Volume 8, Issue 2. Pages 1-7. https://www.ijirct.org/viewPaper.php?paperId=2410051