THE ROLE OF BEHAVIORAL FINANCE IN INVESTMENT DECISION-MAKING

Abstract

Behavioral finance explores how psychological factors influence investors' decision-making, challenging traditional financial theories that assume rational behavior. This paper examines the role of behavioral biases—such as overconfidence, loss aversion, herding, and anchoring—in shaping investment choices. These biases often lead investors to deviate from optimal strategies, resulting in underperformance or increased risk. Understanding the cognitive and emotional aspects of decision-making can improve investment outcomes by fostering more informed, disciplined strategies. Behavioral finance offers valuable insights into market anomalies and helps financial advisors tailor strategies to mitigate irrational behaviors. Future research should focus on integrating behavioral finance with technological advances to further refine decision-making processes.