INFLUENCE OF BEHAVIORAL FINANCE ON INVESTMENT DECISIONS

Abstract

Behavioral finance has emerged as a critical field in understanding the psychological factors that influence investors' decision-making processes. Unlike traditional finance theories, which assume that investors are rational and markets are efficient, behavioral finance explores how cognitive biases, emotions, and social influences lead to deviations from rationality. This study investigates the influence of key behavioral finance elements such as overconfidence, herd behavior, loss aversion, mental accounting, and anchoring on individual investment decisions. Through a combination of literature review and empirical analysis, the research aims to uncover patterns in investor behavior and the extent to which these biases impact portfolio choices and financial outcomes. The findings highlight that behavioral biases significantly shape investment strategies, often leading to suboptimal financial decisions. Understanding these behavioral tendencies can help investors, financial advisors, and policymakers develop strategies to mitigate their adverse effects and promote more informed and rational investment behavior.