Beyond Rationality: How Behavioural Finance Shapes Investment decisions in Financial Markets

Abstract

This research paper explores the impact of behavioral finance biases on investment decisions in the Indian stock market. It examines three key aspects: the disposition effect among traders, the influence of herding behavior and availability bias during significant market events like the GameStop short squeeze and the COVID-19 tech boom, and the quantification of loss aversion in risk profiling methods. Using data from the National Stock Exchange and case studies, the paper analyzes how psychological factors drive investor behavior, often leading to suboptimal decisions. The study highlights the importance of incorporating behavioral biases into financial models and risk assessment tools to better understand and predict market dynamics in an increasingly interconnected financial landscape.