BEHAVIOURAL FINANCE AND INVESTMENT DECISION MAKING

In an ideal market, decision makers are assumed to act rationally and make logical choices, based on the perfect information they have. However, in practicality, most of these decisions are influenced by the decision markers" mental wellbeing, emotions, and behavioural biases, which has an impact on their investment decisions, therefore influencing the outcomes produced by markets. There are several anomalies in the market which can be explained due to behavioural finance, such as sudden rise or fall in stock prices despite strong financial performance, and panic selling during market downturn. Market anomalies have led to an increasingly popular field of financial research, which recognises that investors are impacted by psychological influences like fear, hope, optimism, and pessimism. These emotional drivers have significantly shifted the focus of research in behavioural finance. Pioneering studies by Daniel Kahneman and Amos Tversky ,Richard Thaler, and Robert J. Shiller have explored market efficiency and sought to understand stock market fluctuations through the lens of these behavioural factors. The traditional theory holds that well informed investors are not swayed by emotions and are rarely impacted by the way information is presented to them. While logical investors chart a plan of action before investing, in practice, it is nearly impossible to be as perfect as assumed theoretically. The impact of human behaviour on investment decisions has thus given rise to studies on the matter for the last two decades, as new areas of research prompt new explanations to challenge traditional theories. Implications and principles of behavioural finance-Modern-day investors make inconsistent decisions when it comes to investments. Cognitive illusions, which can be characterized by a mix of heuristics and prospect theory, are illusions based on an individual"s perception of the world. Information is perceived based on prior knowledge or experiences and assumptions. While an investment may look attractive based on solely quantitative factors, the presence of cognitive illusions in practice can distort different induvial investors" view of the same investment, leading to different investment decisions. Heuristics are mental shortcuts that help individuals make quick decisions based on limited information, allowing solutions for complex problems to be made in a limited time frame. By using this approach, decisions may just be sufficient instead of optimal, but are useful to avoid cognitive overload. Financial investors and analysts usually have to process large amounts of information in very short periods of time, thus making heuristics a way to speed up decision making, and avoiding stopping and thinking about each decision.