Decoding Investor Behaviour in Financial Decision-Making: A Critical Evaluation of Standard Finance vs Behavioural Finance
DOI:
https://doi.org/10.36676/jrps.v16.i1.28Keywords:
Behavioural finance, Efficient Market Hypothesis, investor behaviour, psychological factorsAbstract
This paper investigates the interdisciplinary domain of behavioural finance, which combines traditional financial models with the psychological aspects of investor behaviour. It explores the intersection of traditional financial models and investor psychology in behavioural finance, challenges conventional finance's rationality assumptions and discusses market anomalies and psychological influences on decision-making. It critically examines the rationality assumptions inherent in standard finance, especially focused on Fama's (1965) Efficient Market Hypothesis (EMH). Several studies, including Basu (1977), Jegadeesh and Titman (1993), and Barberis and Thaler (2003), challenge the EMH's claim that stock prices take into account all available information. They highlight how psychological and behavioural factors, such as fear, pride, and optimism, may lead to behaviours that deviate from normative rationality and highlight anomalies in the market (Cooper et al., 2001; Kahneman, 2011). This research integrates the results of well-known behavioural finance studies to highlight the psychological aspects that affect financial decision-making. The study develops a comprehensive framework that recognizes the interplay between irrational and rational factors impacting investor behaviour by integrating psychological and financial perspectives. This comprehensive approach not only enhances our understanding of financial markets but also lays the groundwork for developing more prudent investing strategies that incorporate the complexities of human nature.
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