Revisiting Rationality: A Theoretical and Descriptive Review Of Behavioural Finance and Stock Market Dynamics

This article reconsiders the underlying assumptions of traditionality within modern financial theory, evaluating the evolution and efficacy of “Behavioural Finance” in describing actual stock market behaviour. In contrast to the Efficient Market Hypothesis (EMH), Behavioural Finance uses psychological variables like biases, heuristics, overconfidence, herding, and sentiment to explain market anomalies and inefficiencies. This study provides a comprehensive theoretical and descriptive literature review of what has been done so far, examining the nature of behavioural biases in investor choices and a critical examination of bubble, underreaction, and overreaction phenomena.It concludes by making recommendations for improving Behaviouralfinance incorporation into conventional models and draws out the implications for investors, policymakers, and researchers.