Psychological Approaches to Understanding Investor Behavior in Financial Markets

Abstract

Investor behavior is a critical factor influencing financial markets, often deviating from rational decision-making due to psychological biases and cognitive limitations. This review explores key psychological theories and behavioral finance principles that shape investor behavior, including prospect theory, heuristics, and emotional influences. Additionally, it examines the impact of psychological biases on financial decision-making, market anomalies, and investment performance. Understanding these psychological factors can help investors, financial advisors, and policymakers develop strategies to mitigate irrational behavior and improve financial decision-making.