Behavioral Finance and Investor Decision-Making: Psychological Biases in Stock Markets
DOI:
https://doi.org/10.47067/ramss.v8i2.542Keywords:
Behavioral Finance, Psychological Biases, Overconfidence, Loss Aversion, Herd Behavior, Financial Literacy, Investor Decision-Making, Demographic Factors, Stock Market, Market EfficiencyAbstract
The paper has described how psychological biases such as overconfidence, loss aversion and herd behavior affect decision making among investors in stock markets and how the biases depend on demographic factors and investor financial literacy. Quantitative research design was taken and sample size of 280 individual investors based in different large cities i.e. Karachi, Lahore and Islamabad was sampled. A questionnaire containing various sub-questions was used to compile the data on psychological biases, demographic, financial literacy, and investment behavior. Stratified random sampling helped them represent the whole population in terms of age, gender, level of experience, and education. The outcomes revealed that the psychological biases played a an exceptionally important role in affecting the investor decision making because it was observed that the overconfidence biases are the factors that motivate people to engage in risk taking behavior, loss aversion are the factors that make people stay cautious in making independent decision and the herd behavior are the factors that make people follow the majority direction instead of making their own analysis. Based on regression analysis, the demographic variables that affected how investors responded to these biases are age, education and experience, with older, more educated and experienced investors showing a stronger ability to control making a biased decision. These ANOVA findings indicated that financial literacy strongly influenced investment behavior and the most rational and informed decision was made by highly literate investors. Overall, the article highlights the importance of financial education, the understanding of behavioral biases, and focusing on demographic factors to make more effective decisions as an investor and, thus, make the market more efficient.
References
Agrawal, S. S., Sahai, K. P., & Gopal, J. V. (2024). Behavioral Finance and Market Anomalies: Explore How Cognitive Biases and Emotional Factors Influence Investor Behavior and Lead to Market Anomalies. Library of Progress-Library Science, Information Technology & Computer, 44(3).
Ahmad, M., & Wu, Q. (2024). Heuristic-driven biases as mental shortcuts in investment management activities: a qualitative study. Qualitative Research in Financial Markets, 16(2), 291-309.
Amgain, P. N., Khatiwada, S. K., & Dhungana, B. R. (2025). The Impact of Behavioral Biases on Investment Decisions among Nepalese Investors. Dristikon: A Multidisciplinary Journal, 15(1), 137-154.
Barberis, N. C., & Jin, L. J. (2023). Model-free and model-based learning as joint drivers of investor behavior.
Bhanu, B. K. (2023). Behavioral finance and stock market anomalies: Exploring psychological factors influencing investment decisions. Commer. Econ. Manag, 23.
Bogunjoko, A. (2021). Impact of Behavioral Finance on Investment decisions Investigation in to how psychological factors affect Investment decisions among millennial Investors in Nigeria Dublin, National College of Ireland].
Chaudhary, A. K. (2025). The Influence of Behavioral Biases on Investment Decisions in Green Finance Markets.
Fischer, K., & Lehner, O. M. (2021). Behavioral finance research in 2020: Cui bono et quo vadis? ACRN Journal of finance and risk perspectives.
Gill, R. K., & Bajwa, R. (2018). Study on behavioral finance, behavioral biases, and investment decisions. International Journal of Accounting and Financial Management Research, 8(3), 1-14.
Huang, A. H., & You, H. (2023). Artificial intelligence in financial decision-making. In Handbook of Financial Decision Making (pp. 315-335). Edward Elgar Publishing.
Hussain, M., Zulfiqar, B., Shafique, A., Malik, L., & Ashraf, P. (2023). The Impact of Herding, Loss Aversion, and Cognitive Dissonance on Individual Investor's Investment Decision Making: Moderating Role of Financial Literacy. Jinnah Business Review, 11(2).
Jain, R., Sharma, D., Behl, A., & Tiwari, A. K. (2023). Investor personality as a predictor of investment intention–mediating role of overconfidence bias and financial literacy. International Journal of Emerging Markets, 18(12), 5680-5706.
Jappelli, T., & Padula, M. (2015). Investment in financial literacy, social security, and portfolio choice. Journal of Pension Economics & Finance, 14(4), 369-411.
Karki, U., Bhatia, V., & Sharma, D. (2024). A systematic literature review on overconfidence and related biases influencing investment decision making. Economic and Business Review, 26(2), 130-150.
Kommalapati, M. (2024). Managerial Overconfidence and Corporate Investment Decision-Making: Theoretical and Empirical Studies Birmingham City University].
Kumar, S., Rao, S., Goyal, K., & Goyal, N. (2022). Journal of Behavioral and Experimental Finance.
Kwatra, M. (2020). Behavioral finance and stock performance: biases influencing the market. IOSR Journal of Humanities and Social Science, 25(7), 66-69.
Loerwald, D., & Stemmann, A. (2016). Behavioral finance and financial literacy: Educational implications of biases in financial decision making. In International handbook of financial literacy (pp. 25-38). Springer.
Ma, Y., Al Mamun, A., Hoque, M. E., Masukujjaman, M., & Ja’afar, R. (2025). Modeling behavioral insights to mobilize private investment in climate change adaptation: Evidence from Chinese investors. Environment, Development and Sustainability, 1-32.
Malik, A., Shaheen, W. A., & Qasim, M. M. (2025). Cognitive bias asymmetry and heuristic-driven market anomalies: A neurofinancial noise trading analysis of prospect theory elasticity in the Pakistan Stock Exchange (PSX). Social Sciences Spectrum, 4(2), 108-141.
Marjerison, R. K., Han, L., & Chen, J. (2023). Investor behavior during periods of crises: The Chinese funds market during the 2020 pandemic. Review of Integrative Business and Economics Research, 12(1), 71-91.
Nerlekar, V. S., Sane, A., Gadekar, M., Gupta, S. K., & Waghulkar, S. (2025). The herd mentality: Understanding the theories and models of herding behavior in financial Markets. In Psychological Drivers of Herding and Market Overreaction (pp. 255-290). IGI Global Scientific Publishing.
Pant, D., & Pant, S. (2025). Influence of Behavioral Aspects on Stock Investment Decision-Making. The Management Review, 1(1), 92-115.
Polychronakis, N. (2023). Investment behavioural biases: cognitive vs emotional ???????????? ????????].
Pompian, M. M. (2012). Behavioral finance and investor types: managing behavior to make better investment decisions. John Wiley & Sons.
Saivasan, R., & Lokhande, M. (2022). Influence of risk propensity, behavioural biases and demographic factors on equity investors' risk perception. Asian Journal of Economics and Banking, 6(3), 373-403.
Sapkota, M. P., & Chalise, D. R. (2023). Investors’ Behavior and Equity Investment Decision: An Evidence from Nepal. Binus Business Review, 14(2), 209-221.
Sattar, M. A., Toseef, M., & Sattar, M. F. (2020). Behavioral finance biases in investment decision making. International journal of accounting, finance and risk management, 5(2), 69.
Shah, S. Z. A., Ahmad, M., & Mahmood, F. (2018). Heuristic biases in investment decision-making and perceived market efficiency: A survey at the Pakistan stock exchange. Qualitative Research in Financial Markets, 10(1), 85-110.
Sharma, D. R., Adhikari, M., & Khatun, I. (2024). Behavioral Biases of Individual Investors' Decision-Making in Emerging Markets: A Mediation Approach. Journal of Emerging Management Studies, 2(2), 37-54.
Silwal, S., & Ghimire, P. (2025). Behavioral Factors and Risk Perception Affecting Investment Decision in the Context of Nepal. The Batuk, 11(2), 57-77.
Tansuchat, P., & Thaicharo, Y. (2025). Cognitive Biases and Investment Choices: Exploring the Psychological Determinants of Financial Decision-Making in Thailand. Journal of Business and Economic Options, 8(1), 43-60.
Thakkar, H., Patel, H., & Vidani, J. (2024). A Study on Factor Affecting Investment in NSE and BSE Among Gen-Z Palanpur.
Wang, L., Feng, X., & Zang, L. (2024). Does risk perception influence individual investors' crowdfunding investment decision-making behavior in the metaverse tourism? Finance Research Letters, 62, 105168.
Yang, M., Mamun, A. A., Mohiuddin, M., Al-Shami, S. S. A., & Zainol, N. R. (2021). Predicting stock market investment intention and behavior among Malaysian working adults using partial least squares structural equation modeling. Mathematics, 9(8), 873.
