Role of Behavioural Finance in Investment Decision Making

This study examines the influence of behavioral biases on the investment decision-making of individual investors. While traditional finance theories assume that investors act rationally and make decisions based on complete information and logical evaluation, real-world behavior often deviates from this assumption due to emotional, psychological, and social influences. The primary objective of this research is to analyze how behavioral factors affect the choice of investment avenues, with particular emphasis on young and first-time investors. Primary data for the study were collected through a structured questionnaire administered to 171 respondents across different age groups, income levels, occupations, and levels of investment experience. The responses were recorded and analyzed using Google Forms and spreadsheet tools. The findings indicate that a majority of respondents fall within the “Below 20” and “20–25” age categories, with most participants being students. A significant proportion of respondents reported having no income and no prior investment experience, highlighting that the sample largely consists of young investors at the early stage of their financial journey. The study further explores respondents’ preferred investment avenues and finds that mutual funds, shares, gold, and fixed deposits are the most commonly selected options. Mutual funds emerge as the most preferred choice, particularly among students and individuals with no income or investment experience, reflecting a preference for options perceived as safer and easier to understand. Gold and fixed deposits are also widely favored, indicating the influence of traditional and conservative investment thinking. In contrast, investment in shares is more common among respondents with some level of income or prior experience, suggesting relatively higher risk tolerance. The results reveal that behavioral biases such as herd behavior, risk aversion, familiarity bias, and overconfidence significantly influence investment decisions. Many respondents tend to follow popular investment trends rather than conducting independent analysis. Risk-averse behavior is prominent among younger and inexperienced investors, while familiarity bias is evident in the preference for well-known investment avenues. A smaller segment of respondents demonstrates overconfidence by choosing riskier investments despite limited experience. Overall, the study underscores the importance of behavioral finance in understanding actual investment behavior. The findings highlight that investors do not always act rationally and are strongly influenced by psychological factors. The study provides useful insights for students, new investors, and financial advisors in recognizing and managing behavioral biases. However, as the sample is predominantly composed of young individuals and students, the results cannot be fully generalized. Future research may include a more diverse sample of working professionals and experienced investors to obtain broader insights. Faculty Guide: Dr. Thirupathi Manickam