Behavioral Finance: Understanding Investor Behavior in Uncertain Markets

Abstract

Behavioral finance offers critical insights into how psychological factors and cognitive biases influence investor decisions, particularly in uncertain markets. Traditional financial models assume that investors are rational actors who make decisions based on available information and logical analysis. However, behavioral finance challenges this notion by examining how emotions, heuristics, overconfidence, and market sentiment impact financial decisions, often leading to irrational outcomes. This paper explores the fundamental concepts of behavioral finance, focusing on how these elements shape investor behavior during periods of market volatility. By understanding these behavioral tendencies, investors, financial advisors, and policymakers can develop strategies to mitigate risks and optimize decision-making in uncertain environments.