PSYCHOLOGICAL DETERMINANTS OF INVESTOR BEHAVIOR: AN EMPIRICAL INVESTIGATION OF COGNITIVE BIASES IN CAPITAL MARKETS

Abstract

Investors are treated as rational decision-makers according to anticipated utility theory in traditional financial theory. Contrarily, Behavioral Finance strongly disagrees with this rationale point of view, arguing that investors frequently stray from rationality when making investment decisions. Investors today frequently make foolish investment decisions. Frequently, the choice is based on an assumption that is far from rational. When faced with a risky circumstance, investors' decisions are frequently influenced by their objectivity, emotions, and other psychological aspects. Here the primary data is used to collect data through questionnaires and secondary data is used for literature review. The study examines the impact of behavioral bias on investors based on age and education. The study explores various behavioral biases such as herding, endowment, familiarity, overconfidence, recency, loss aversion, and regret aversion. These biases play a significant role in shaping investors' decision-making, often resulting in irrational actions within financial markets. By analyzing these tendencies, we can better understand how emotions and mental shortcuts influence investment decisions, which in turn can affect both returns and risk management strategies. Results show no significant relationship between age and biases, with the null hypothesis accepted and the alternate hypothesis rejected. Overconfidence bias, recency, familiarity, and loss aversion bias are more influenced by investors with science and diploma qualifications, while commerce background investors are less influenced.