Decoding Behavioural Finance: A Critical Review of Investor Psychology and Market Anomalies

Abstract

Purpose: This study critically examines behavioural finance better to understand investor psychology and the occurrence of market irregularities. It discusses core behavioural theories, evaluates the limitations of traditional financial frameworks, and assesses the practical relevance of these insights for investors and policymakers.
Design: This study adopts a qualitative approach, incorporating insights from a literature review and empirical findings drawn from various researchers in the field of behavioural finance. It includes qualitative studies that explore past financial crises, psychological biases, and investor decision-making patterns, offering a comprehensive understanding of investor behaviour.
Findings: The results indicate that cognitive and emotional distortions significantly affect investor decisions, contributing to market inefficiencies. The paper highlights several prominent biases—such as aversion to loss, excessive confidence, and group-driven decision patterns—that can shape market trends and individual investment behaviour.
Practical Implication: Gaining awareness of behavioural tendencies can help investors make better-informed decisions, implement structured financial strategies, and avoid falling into market traps. These insights also support regulators in forming policies that improve market stability and guard against irrational investor actions..
Value: This work adds to the behavioural finance literature by linking psychological theories with conventional financial thought. It offers useful perspectives to investors, advisors, and policymakers, aiding in the formulation of more robust and adaptive investment strategies.