A STUDY ON IMPACT OF BEHAVIOURAL FINANCE IN INVESTMENT DECISION MAKING (KEY IJP************923)

• Dr R Jeyalakshmi, K Swetha

Abstract

Behavioral finance combines insights from psychology and economics to explore how mental shortcuts and emotional influences impact the investment decisions of people. The conventional view in finance suggests that investors are logical and consistently make choices that improve their financial well-being. However, behavioral finance questions this view by showing that various psychological elements can lead to irrational actions, affecting investment decisions and the overall state of the market. A key idea in behavioral finance is the concept of cognitive biases, which are systematic deviations from what is considered normal or rational in the overconfidence bias that makes investors believe they know more than they actually do leading to excessive trading and a higher risk of financial loss. Likewise, the fear of losing money makes investors focus on avoiding losses instead of seeking equivalent gains, which can result in holding onto falling assets or missing out on profitable investments because of the fear of losing money. Another important bias is herd behavior, where investors tend to follow the crowd, which can cause market bubbles and crashes as investors react to trends instead of making their own decisions. These biases have a significant effect on both individual investors and the wider financial landscape. In a bull market, overconfidence can push asset prices higher as investors chase after high returns, while in a bear market, fear of loss can cause panic selling, making market declines worse. Such actions can introduce volatility and inefficiencies, as asset prices may swing far from their true values due to the irrational actions of market participants. Moreover, it's essential for those in the investment field to understand the principles of behavioral finance. By acknowledging the possibility of bias in their own decisions, financial advisors and portfolio managers can develop strategies to lessen these effects.