Behavioral Finance and Market Inefficiencies: Analyzing the Influence of Investor Psychology, Heuristics, and Biases on Stock Market Anomalies and Investment Decision-Making

Abstract

This study investigates the role of investor psychology, heuristics, and cognitive biases in contributing to stock market anomalies and irrational investment choices. Key psychological factors examined include overconfidence, anchoring, loss aversion, and herd behavior. Adopting a mixed-methods approach, the research combines responses from 400 investor surveys with qualitative interviews of 15 financial experts. The results reveal that overconfidence and herd behavior have a particularly strong negative impact on investment decisions, while anchoring and loss aversion also significantly influence market outcomes. Statistical analysis and regression modeling show how these biases contribute to inefficiencies such as momentum effects and mispricing of securities. Qualitative insights further emphasize that emotional decision-making and media-driven panic are recurring barriers to rational investing. The study suggests implementing investor education initiatives, utilizing robo-advisors, and applying behavioral commitment strategies as potential solutions to mitigate bias-influenced decisions. By integrating behavioral insights with quantitative analysis, this research underscores the critical role of psychology in financial markets and offers practical tools for promoting rational decision-making and enhancing market stability.

Keywords:

Behavioral finance, cognitive biases, herd behavior, investment decision-making, market inefficiencies, overconfidence