Behavioral Finance and Investment Decision-Making: Psychological Factors Affecting Investors
Abstract: Traditional financial theories generally assume that investors are rational decision-makers who systematically evaluate available information and seek to maximize expected returns for a given level of risk. However, actual investment behavior frequently deviates from these assumptions. Behavioral finance provides an alternative framework by integrating insights from psychology, economics, and finance to explain how cognitive biases, emotions, social influences, and psychological heuristics affect investment decisions. This paper examines the major psychological factors influencing investor decision-making, with particular emphasis on overconfidence, loss aversion, anchoring, herd behavior, confirmation bias, representativeness, mental accounting, disposition effect, availability bias, regret aversion, and emotional responses to market conditions. The study adopts a conceptual and systematic literature-review approach to synthesize major theoretical and empirical contributions to behavioral finance. The analysis demonstrates that psychological biases can significantly influence investors? perceptions of risk, security selection, portfolio diversification, trading frequency, and reactions to market fluctuations. These biases may lead investors to depart from rational investment principles and contribute to market anomalies and volatility. The paper concludes that understanding behavioral biases is essential for individual investors, financial advisers, portfolio managers, policymakers, and financial institutions. Improving financial literacy, adopting systematic investment processes, diversifying portfolios, and using technology-based decision-support systems can reduce the negative consequences of behavioral biases. Behavioral finance therefore provides an important framework for understanding real-world investment behavior and improving the quality of financial decision-making.
Keywords: Behavioral Finance, Investment Decision-Making, Investor Psychology, Cognitive Biases, Loss Aversion, Overconfidence, Herd Behavior, Investment Behavior, Financial Markets, Prospect Theory
How to Cite?: Dr. Saddam Hussain, "Behavioral Finance and Investment Decision-Making: Psychological Factors Affecting Investors", Volume 15 Issue 9, September 2026, International Journal of Science and Research (IJSR), Pages: 1931-1937, https://www.ijsr.net/getabstract.php?paperid=SR26928193442, DOI: https://dx.doi.org/10.21275/SR26928193442