Behavioral Finance: Impact of Psychology, Market Forces, and Social Influence on Portfolio Returns

Traditional finance assumes rational decision-making in the stock market. This is challenged by behavioural finance, which postulates that cognitive biases, market dynamics, and social persuasion influence investors. Hence, this study on 300 retail investors at the Pakistan Stock Exchange (PSX) explores the impact of these factors on portfolio returns. The results indicate that cognitive biases, such as anchoring and overconfidence, lead to suboptimal decisions. Conversely, investors attuned to market dynamics make more successful choices, while resistance to social persuasion enhances decision quality. The findings highlight the need for investor awareness and mitigation of cognitive biases. Fund managers should incorporate these insights into strategies and regulators should educate investors on biases, while implementing policies against market manipulation.