Behavioural Finance and Investor Decision Making

Abstract

Efficient markets, according to conventional financial theories like the Efficient Market Hypothesis, reflect all available information and investors behave rationally. Nevertheless, by including psychological variables and cognitive biases into the financial decision-making process, behavioural finance casts doubt on these ideas. In bridging the gap between psychological understanding and economic financial theories, this study investigates how much behavioural bias influences investor decisions and market results. The main purpose of this study is to examine how behavioral biases such as herd mentality, anchoring, loss aversion, overconfidence and recency bias affect investor decisions. The study also attempts to assess how these biases affect asset prices, market dynamics and the overall efficiency of financial markets. Using a mixed-methods approach, this study combines extensive literature research with quantitative analyses. The survey, which is part of the quantitative component, is given to a sample of seventy investors who have been grouped into three categories according to their risk tolerance: aggressive, moderate, and conservative. To investigate the connections between behavioural biases and investment performance, descriptive statistics, factor analysis, and regression analysis were conducted on the gathered data using SPSS. According to the research, behavioural biases have a big impact on market dynamics and investing choices. Mean scores suggested moderate to high levels of cognitive biases like overconfidence and anchoring, which were descriptive statistics' indications of common biases among investors. Reliability bias and herd mentality are two examples of the biases that have been shown through factor analysis to affect investor behaviour more than others. The findings were corroborated by regression analysis, which demonstrated a strong model fit and noteworthy associations between the performance and decision-making of investments and the observed biases. The study provides unambiguous evidence that behavioural biases have a major influence on investor behaviour and exacerbate market inefficiencies. Due to these biases, judgement and decision-making errors occur more frequently, mispricing assets and escalating market volatility. In order to reduce the negative consequences of cognitive biases and improve market efficiency, the research emphasises how important it is to incorporate behavioural insights into financial procedures. To increase investor welfare and market stability, financial educators, advisors, and legislators should take these findings into account