The Role of Behavioural Finance in Investment Decision Making

Historically, investment decision-making has been studied through the scope of classical economic paradigms, which view investors as rational agents functioning within efficient markets. These models posit that people systematically evaluate financial information to make choices that maximize utility or returns. However, an increasing empirical body of research poses important challenges to this view depicting investment behaviour as rational by showing how investors often behave in ways that are considered deviant from rationality. Investors are greatly influenced by psychological factors as well as cognitive errors, which, often, lead to Poor irritational Decisions. This paper delves into the growing area of study combining finance and psychology known as behavioural finance to understand the actual behaviour of investors. The research pays attention to the primary behavioural biases such as overconfidence, loss aversion, herd mentality, anchoring and mental accounting, and analyses how these misperceptions impact investment decision-making, risk evaluation and engagement in the markets. To support the theoretical framework, the study incorporates an empirical component based on a questionnaire administered to a sample of 150 retail investors in India. Behavioural biases were found to be pervasive among the investing subjects trying to make optimal investment decisions.