Behavioural Finance and Investment Decisions among Young Investors

Abstract

This paper looks at the impact of the behavioural finance variables on the investment behaviour of the young investors, a key segment that is more involved in financial markets with increased access to digital platforms and financial information. Traditional theories of finance assume that investors are rational but behavioural finance also focuses on existence of psychological biases and emotional influences on finance decisions. The paper will focus on the key behavioural biases, such as overconfidence, herd behaviour, loss aversion, mental accounting and anchoring, and the role of the described biases in the decision-making pattern of young investors.

The research design adopted in the research is descriptive and analytic research design; primary data were used in the research and it was collected through structured questionnaires that were administered to young investors of a specific age. Regression, as well as correlation analysis, are some of the statistical tools that are utilized in determining correlations between behavioural variables and investment decisions. The findings indicate that behavioural biases are very influential in investment preferences, risk and diversification of portfolio. The overtrading habit is aided by overconfidence and the herd effect is a factor that makes investors trade without due research as per market trends. Loss aversion creates a reluctance to sell non-performing assets and anchoring creates a tendency to cling to the first information or past prices. According to the study, the causes of suboptimal investment performance could be emotional and cognitive biases and that one has to be financially conscious and possess rational decision-making styles. It also reveals that financial education programs and advisory services can be used to educate young investors to be conscious of the impact of these biases and mitigate them. This study adds to the existing literature on behavioral finance as it gives an insight on the investment behavior of young people in a dynamic financial world. It also offers some real-life implications to the policy-makers, financial advisors and educators who want to enhance investor decision-making and market efficiency.