Behavioral Finance and Stock Market Anomalies: Exploring Psychological Factors Influencing Investment Decisions

Abstract

Behavioural finance questions the rational decision-making process that is based on the information and economic realities of traditional finance. This study investigates the impact of emotions and irrationality on financial decision-making. The increase in study on stock market anomalies leads to an investigation of the psychological factors that influence irrational investor behaviour and market inefficiencies. This research challenges the principles of rational finance theories by examining the significant impact of behavioural finance on stock market anomalies. The study demonstrates the impact of biases, emotions, and cognitive errors on human behaviour, highlighting specific cognitive faults such as anchoring bias, overconfidence, and loss aversion. These flaws lead to distorted decision-making and contribute to market anomalies The study of investing social dynamics explores the phenomenon of herd mentality and the unreasonable increases in asset values. In addition to questioning established financial theories, behavioural finance has the potential to assist investors, politicians, and market regulators. The study aims to construct intricate models that accurately depict financial decision-making by examining psychological variables that give rise to market oddities. The incorporation of behavioural finance into investment decision-making has transformative consequences for investors and financial professionals. Investors acquire the ability to make more astute decisions, spread out risks, and manage market instability by using emotional intelligence. Behavioural data may assist financial professionals in enhancing client-advisor relationships, refining communication methods, and increasing competitiveness in an evolving financial landscape. Behavioural finance provides a constantly evolving understanding influenced by biases and emotions, which poses a challenge to financial practices.