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Behavioral Finance — How Psychology Shapes Investment Decisions

Markets don’t just move on numbers — they move on human behavior. This is the essence of behavioral finance : understanding how psychology, emotions, and biases influence investment decisions. 🔎 What Is Behavioral Finance? Behavioral finance studies the impact of cognitive biases and emotional reactions on financial decisions. It explains why investors often: • Buy high and sell low • Follow the crowd ( herd mentality ) • Panic during downturns • Hold losing stocks too long ⚙️ Key Biases in Investing • Loss Aversion : Fear of losses is stronger than joy of gains • Overconfidence Bias : Believing we know more than the market • Anchoring Bias : Sticking to irrelevant reference points (like IPO price ) • Herd Mentality : Following trends without analysis • Recency Bias : Assuming recent events will continue forever 📊 India Example: Retail Investor Behavior • Heavy SIP inflows show discipline • But short‑term panic selling during volatility reveals loss avers...