Behavioral Finance: How Psychology Influences Investment Decision Making?

Abstract

The article investigates the impact of cognitive distortions, emotional factors and social environment on the investment behaviour of financial market participants. Behavioural finance, which is increasingly attracting the attention of scholars and practitioners, offers a more realistic approach to analysing investor decisions than traditional models of rational choice. The article focuses on generalising knowledge about such irrational manifestations as the confirmation effect, overconfidence, loss avoidance, group influence and information asymmetry within the framework of a systematic approach. The study's relevance is stipulated by the need to adapt financial strategies to the behavioural characteristics of markets, which often violate traditional assumptions of efficiency and rationality. Understanding the influence of cognitive biases and social factors allows not only to predict market participants' behaviour more accurately but also to build more sustainable and inclusive financial systems. Such aspects are particularly important for crisis prevention and risk mitigation in a rapidly changing information environment.

The research methods include analyzing theoretical sources on behavioural finance, empirical data, and examples of market anomalies. The interdisciplinary approach integrates knowledge from economics, psychology, and sociology to identify patterns and develop practical recommendations. The results show that cognitive biases are formed as a result of a complex interaction between emotions, group dynamics, and the information environment. For example, overconfidence leads to increased trading activity, while loss aversion causes irrational behaviour during crisis periods. The influence of social factors is also significant: group pressure often exacerbates mistakes, and manipulation of the information environment contributes to the formation or deepening of market bubbles.

Conclusions. Generalising irrational behaviour through the prism of behavioural finance contributes to a deeper understanding of the complex dynamics of financial markets. The results emphasise the importance of considering behavioural factors in the development of financial strategies and regulatory approaches to enhance the resilience of market systems.