Role of Behavioral Finance in Investment Decisions

Abstract

Behavioral finance challenges the traditional idea of rational investors by exploring how psychological factors and cognitive biases affect investment decisions. This research investigates the ways in which emotions, heuristics, and behavioral biases such as overconfidence, loss aversion, herd behavior, and anchoring influence investors' risk perceptions and choices. The research highlights how these biases lead to suboptimal investment results, inefficiencies in the market, and irrational decision-making. In this study, a qualitative descriptive-explanatory methodology was employed. Reputable academic publications, books, and articles provided the data, which was analyzed using a qualitative interpretivist methodology. By analyzing a collection of current research, the paper emphasizes the importance of behavioral finance in understanding real investor behavior. By using behavioral insights, investors and financial experts may make better choices, effectively manage risks, and enhance long-term investment success.