Behavioral Finance and Investment Decisions of Retail Investors in Emerging Markets

Abstract

Traditional financial theories assume that investors behave rationally and always make decisions that maximize their wealth. However, real-world investment behavior often deviates from rationality due to psychological and emotional factors. Behavioral finance explains how cognitive biases and emotional influences affect financial decision-making. This study examines the impact of behavioral biases on the investment decisions of retail investors in emerging markets. The research focuses on common behavioral biases such as overconfidence, herding behavior, loss aversion, anchoring, and mental accounting. The findings suggest that behavioral factors significantly influence retail investors’ decision-making processes, risk perception, and portfolio choices. The study highlights the importance of financial literacy and awareness of behavioral biases to improve investment outcomes.