A Behavioural Finance Analysis of Investors Psychology During Bear Market in India

This study explores how retail investors in India make decisions during bear markets by focusing on the psychological and behavioural factors that drive their actions. By blending concepts from behavioural finance with real-world data and investor insights, this study offers a comprehensive look into the minds of everyday investors during periods of market stress. Using a mixed-methods approach, this study analyses NSE/BSE market data from 2015 to 2023, tracks social media sentiment through natural language processing (NLP), and incorporates survey responses from over 50 retail investors. The findings indicate to three dominant behavioural patterns: loss aversion, herd mentality, and cultural biase. Notably, 60% of investors hold loss-making stocks, a clear sign of loss aversion, echoing Kahneman and Tversky’s Prospect Theory. Meanwhile, 67% follow the crowd, often influenced by social media and finance influencers, with susceptibility rising to 78% among investors under the age of 25. Cultural tendencies also play a strong role: nearly half (47%) of investors moved funds into gold or fixed deposits after market downturns, revealing deep-seated preferences for traditional "safe-haven" assets. The statistical analysis highlights significant trends. Social media sentiment is strongly correlated with mid-cap stock volatility (r = 0.71, p < 0.001), whereas investor overconfidence increases with portfolio size (r = 0.39, p = 0.008). Regulatory tools such as circuit breakers used during the 2020 COVID crash only reduced panic selling by approximately 20%, raising concerns about their effectiveness. This study critiques SEBI’s largely reactive regulatory stance and calls for proactive solutions: AI-driven systems to monitor misinformation; gamified investor education to address cognitive biases; and hybrid financial products (such as gold ETFs) that merge cultural preferences with modern investing strategies. By tailoring global theories such as Shiller’s concept of herding and Lo’s Adaptive Market Hypothesis to India’s unique digital and cultural environment, this study provides actionable insights for investors, regulators, and policymakers. It stresses the need for adaptive frameworks that can reduce behavioural risks, stabilize markets, and help India realise its $5 trillion economic ambition without being derailed by retail-driven volatility.