BEHAVIOURAL FINANCE THEORIES AND INVESTOR DECISION-MAKING IN VOLATILE MARKETS

Abstract

Investor behaviour in financial markets has long been studied through the lens of traditional finance, which assumes rationality, efficient markets, and decisions based on objective information. However, periods of market volatility reveal consistent deviations from these assumptions, as investors frequently make choices influenced by emotions, biases, and psychological heuristics. This article explores the role of behavioural finance in understanding investor decision-making under volatile conditions. Drawing on key theories such as prospect theory, mental accounting, overconfidence, herding behaviour, anchoring, and regret aversion, the study examines how cognitive and emotional factors shape investment choices during uncertainty. Empirical evidence from global crises, including the 2008 financial meltdown and the COVID-19 pandemic, as well as from emerging markets like India and China, illustrates recurring behavioural patterns such as panic selling, excessive risk-taking, and herd-driven speculation. The analysis demonstrates that investor psychology is not random but systematic, offering valuable insights for improving investment strategies, advisory practices, and regulatory policies. The article further highlights the practical implications of behavioural finance, emphasizing its role in fostering investor discipline, strengthening client-advisor relationships, and guiding policymakers in stabilizing markets. Overall, the study underscores the importance of integrating psychological perspectives with traditional models to develop a more comprehensive understanding of investor behaviour in volatile financial environments.