Behavioral Finance and Decision-Making

Capital markets have recently attracted the attention of investment firms from all over the

world, and the number is growing for a variety of purposes, including decreasing interest

rates, uncertainty, and fluctuations among stocks and bonds, increased awareness of

investment opportunities, proper trading, and the growing impact of technology in financial

markets.

Specific investment choices are heavily influenced by human psychology. The effect of

psychology on business managers' behavior and the corresponding output in markets are

studied in behavioral finance, which focuses on how investment managers make choices,

specifically how they view and act on real facts ((Ricciardi and Simon, 2000). Investors can

suffer from perceptual and emotional weaknesses, which will influence their investment

decisions. Investment managers should understand the mentality of an individual who plays a

critical part in financial market behavior depends on the investor's rationale. Investors'

decision-making is often influenced by intellectual and motivational considerations, allowing

investment managers to effectively consider particular investors and thereby aid in bringing

about a substantive shift in their investment choices based on demographic factors (Adams

and Finn, 2014).

According to (Agrawal, 2012), behavioral perceptions have always had and will continue to

affect investor decisions. Though it is impossible for an investor to entirely eradicate

behavioral perceptions, it is critical to avoid them in such circumstances. Good financial

choices in the past affect investors' investment choices, and they are more likely to see a trend

where nothing exists.

The first part of investment analysis is to establish the investing approach to make better

investment decisions. If an investor prefers financial analysis, technological analysis, or

personal judgment is a matter of personal preference. The more recent and important an

incident is, the more likely it is to affect decision-making, according to (Qawi, 2010). Quick

patterns, such as an increase in the price of existing stock or a sector that has recently

outperformed those in the economy, attracted more attention. Investors can influence their

portfolios by missing crucial pieces of evidence and making financial decisions dependent on

a single reality, and they can lose time in the long term as a result. The financial analysis

examines related indicators that impact projected stock price fluctuations, such as financial

statements, profit or loss accounts, return on equity, dividends, and market conditions.

Investors who use technical analysis, on the other hand, just look at actual stock market

fluctuations, assuming that historical evidence will predict potential stock market volatility

(Antony, 2019).

The investors' objectives are aligned with investment priorities. The main interpretation of

behavioral finance is that investors with high achievement targets behave as though they have

a high-risk threshold, meaning that investors who set high achievement thresholds with a high

chance of reaching such levels will prefer risky investments. Sometimes investors work

against themselves. The risk associated with how other people make investment choices is

often greater than the risk associated with the investment itself. According to financial theory,

investors are risk-averse. They will stop taking on too much risk and will purchase or sell

investments to mitigate risk. Logic dictates that the investor's decision to keep or sell each

investment is dependent on the investor's perceptions of potential increases in value.

When challenged with a variety of options for investing their capital, investors would choose

those that speak of potential profits rather than those that speak of potential losses. When

looking at the characteristics of investors, it's clear that they're looking for ways to maximize

their profits. By lowering the cost of their investment, they will maximize their return. But

many investors would find it very difficult to obtain the returns they initially anticipated after
taxation, investment fees, and inflation. Connect to it the idea that behavioral finance is not

necessarily rational, and it becomes much more difficult to achieve long-term investment

results. Another behavioral characteristic is for investors to overstate their risk tolerance.

During times of stock market fluctuations, this can be risky. Investors must be aware of the

various behavioral influences that can impact their investment decision-making approach,

and they should be mindful of these factors. When making investing decisions, investors

must aim to avoid these behavioral patterns as far as possible.

References

Adams B and Finn B (2006). “The story of Behavioural Finance”, LincolniUniverse.

Agrawal, K. (2012). A Conceptual Framework of Behavioral Biases in Finance. The IUP

Journal of Behavioural Finance, 9(1), 7-18.

Antony, A., (2019). Behavioral finance and portfolio management: Review of theory and

literature. Journal of Public Affairs, 20(2).

Mortimer A. Dittenhofer (2001). Behavioral aspects of government financial management.

Management Auditing Journal, 451 - 457

Qawi, R. B. (2010). Behavioral Finance: Is Investor Psyche Driving Market Performance?

Ricciardi, V., & Simon, H. K. (2000). What is behavioral finance? The Busi-

ness, Education and Technology Journal, 2, 2 6 –34.

Rupali et al. (2018). Behavioral mediators of financial decision making – a state-of-art

literature review. Review of Behavioral Finance, Vol. 10 No. 1, pp. 2 – 41

Sujata et al (2017). Behavioral Finance: A Review. Procedia Computer Science 122, 50 - 54