Behavioural Biases and Their Impact on Retail Investment Decisions: A Psychological Perspective
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Abstract
The traditional theories of finance often assume that investors act rationally, making decisions purely based on logic and available information. However, real-world investment behaviour frequently deviates from this ideal due to various psychological influences. This research explores the impact of behavioural biases on the investment decisions of retail investors, with a specific focus on how cognitive and emotional factors influence decision-making in the financial markets. Drawing upon the principles of behavioural finance, the study identifies and analyses key psychological biases such as hindsight bias, confirmation bias, optimism bias, herding behaviour, and overconfidence bias. Through a structured questionnaire and quantitative analysis, the study gathers data from a diverse set of retail investors to examine how these biases manifest in investment behaviour across demographic segments. The findings suggest that these biases significantly affect portfolio choices, risk perception, and reaction to market volatility. For instance, overconfidence often leads to excessive trading, while herding behaviour pushes investors to follow the crowd despite personal analysis. By integrating psychological insights with financial decision-making, this study underscores the importance of investor education and awareness in mitigating irrational investment behaviours. The research contributes to a deeper understanding of the non-rational forces shaping retail investor behaviour and offers recommendations for financial advisors, regulators, and policymakers to enhance financial literacy and promote sound investment practices.
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References
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