Investor Psychology and Market Bubbles: A Behavioral Finance Perspective

ABSTRACT Through the lens of behavioural finance, this study explores the significant impact of investor psychology on irrational decision-making and the formation of market bubbles. Real-world market behaviour frequently reveals a different picture, one that includes emotions, cognitive shortcuts, and psychological biases, in contrast to traditional financial theories that assume investors behave rationally and always aim to maximise returns. Through the use of a mixed-method research design that combines secondary sources like academic literature and real-world case studies with primary data from investor surveys, this paper aims to reveal how emotions like overconfidence, greed, and fear significantly influence financial decisions. The study validates important theories like Prospect Theory and Herd Behaviour by highlighting behavioural patterns like emotional contagion, herd mentality, and loss aversion. The insights gained are valuable not only for investors, but also for financial advisors, educators, and policy-makers who aim to foster more rational and informed investing behavior.