Expressions of Irrational Investment Behaviour and Proposals to Reduce the Irrational Behaviour

Abstract

Behaviour finance gained more and more weight in the development of finance theory in comparison to standard finance theory which is dominated by the efficient market hypothesis. As a field of behavioural economics, it combines psychology and finance to understand how human behaviour and cognitive biases impact financial decision-making. Some market anomalies which seem strange or impossible according to standard finance theory can be understood and explained with the help of behavioural finance theory. Through analysis and literature review, this paper explores the common expressions of irrational behaviour such as representativeness, herd effect, anchoring, overconfidence, and their effect on the investment financial market. This paper finds that people can be easily influenced by any given information. Individuals personalities and social backgrounds also play a decisive role in making investment decisions. Therefore, some possibilities and advice to reduce the losses caused by human cognitive biases are also provided in the paper.