Behavioural Economics and Investment Decisions: Analyzing How Psychological Biases Influence Individual and Institutional Investments

Abstract

The paper focuses on how psychological effects influence the ordering of investments with the help of the comparative analysis of the traditional and behavioral view on the matter. It analyses sentiments like overconfidence, herding, loss aversion, anchoring and confirmation both with the retail investor and the institutional investor. These biases complicate rational decision-making, hence destabilize markets, lead to inefficiencies and possible financial fiascos. The work also introduces ways to manage biases in the financial literacy process, such as financial education, technology-based interventions, and behavioral interventions. Studying the consequences of these biases, the paper stresses the necessity of employing a comprehensive approach to enhance investment and enhance the financial stability.