Impact of Behavioural Finance on Retail Investors’ Stock Market Decisions

Abstract

Behavioural finance integrates psychological insights into financial theory to explain why real investors deviate systematically from the rational-agent model. This paper examines how behavioural biases, including overconfidence, loss aversion, mental accounting, herding, anchoring, and representativeness, influence retail investors’ stock market decisions. Using a mixed-methods literature synthesis and a small empirical framework proposal, the study links classic theoretical foundations (prospect theory, dual-process thinking) with empirical findings on retail trading performance, social-media-driven trading, and pandemic-era retail participation. Key findings indicate that biases systematically affect portfolio choice, trading frequency, trading returns, and susceptibility to speculative episodes; technological changes (commission-free trading, mobile apps, and social media) amplify some biases while offering tools to mitigate others. The paper concludes with implications for financial education, brokerage platform design, regulators, and future research directions.