Behavioral Finance: Investor Psychology in Volatile Markets

Abstract

Behavioral finance offers critical insights into how psychological biases shape investor decision-making, particularly during periods of market volatility. Traditional finance theories assume rational behavior, but behavioral finance highlights how emotions and cognitive biases like overconfidence, herding, loss aversion, and anchoring significantly impact market dynamics. In volatile markets, these biases become more pronounced, often resulting in irrational actions that deviate from rational expectations. This paper explores the role of investor psychology in influencing market outcomes, examining biases and emotional factors that drive investor actions. Practical implications of this understanding suggest strategies to mitigate risk and stabilize markets, such as behavioral nudges and AI-driven advisory tools. The paper also identifies research gaps, especially in understanding the influence of digital platforms and social media on investor behavior, indicating areas for further study to deepen our grasp of investor psychology in an increasingly digital world.