The Influence of Behavioral Finance on Investment Decision Making

Abstract

Traditional finance theories propose that individuals make rational investment decisions by carefully weighing risk and return factors to maximize gains while minimizing losses. However, behavioral finance challenges this notion by suggesting that various biases influence individual investment decisions. These biases include heuristic biases like anchoring, representativeness, and the gambler's fallacy, as well as psychological phenomena such as regret aversion, framing, and the disposition effect, as outlined in prospect theory. This research paper seeks to examine the impact of these biases on the investment decision-making process and explore strategies that individual investors can employ to make more rational decisions. By analyzing how practical considerations constrain individual decision-making, the paper concludes that investors must diligently gather and analyze data while considering external factors before making investment decisions.