Behavioural Finance & Understanding Investor Decision Making in the Stock Market

Abstract: This paper discusses the problem of behavioral finance and how it affects the stock market investors in the decision making process. Unlike the traditional financial theories which assume the rationality of investors, this study highlights the significance of psychological factors such as emotions, thinking errors, and social effects that guide to a particular choice of the investor. This paper primarily concerns itself with the different types of bias, i.e., overconfidence, loss aversion, herding effect, anchoring, confirmation bias, mental accounting, and regret aversion.

Primary and secondary data were collection of this type of research will be carried out. Primary data will be comprised of questionnaires that are completed by the respondents. It will also use the 5 point Likert Scale to assess the importance of the biases in investors' decision-making process. To analyze the data, a graphical (through use of histograms) and a statistical approach will be used. Therefore, one assume that the loss aversion and the regret aversion predominate over all the other biases; other powerful biases include herding and confirmation bias. There is moderate levels of overconfidence and anchoring.

This paper concludes that it is clear that rational thinking is not the only factor that investors consider in decision-making. The psychology of the investors is significant in motivating their behavior and the decisions they make. The biases are some of the loss aversion, herd behavior and also the incomplete information. This sense implies that a critical psychological sense of their economic is highly rated to investors as a way of making their own productive investments.