Behavioural Influences on Investment Strategies: The Role of Emotions, Biases, and Market Dynamics

The study examines the impact of psychological biases overconfidence, loss aversion, and herding behaviour on investment decisions using a mixed-methods approach combining quantitative surveys and qualitative interviews. A sample of 500 investors, including retail and institutional participants, was analyzed to assess behavioural patterns, risk tolerance, and market dynamics. Quantitative analysis revealed that overconfidence positively influenced trading frequency, with highly confident investors executing up to 20 trades per month, exhibiting a risk profile of 8, and achieving annual returns of 12%. Loss aversion, however, demonstrated negative correlations with investment returns (-0.48) and risk tolerance (-0.56), leading to conservative strategies and suboptimal decision-making during downturns. Herding behaviour intensified during volatile and crisis periods, with herding intensity rising from 4 in stable markets to 9 during crises, affecting 80% of participants. Regression analysis confirmed that overconfidence was a positive predictor of returns (β = 0.45, p = 0.001) and risk-taking, while loss aversion had a negative effect (β = -0.38, p = 0.005). Herding behaviour influenced decision patterns (β = 0.25, p = 0.012), particularly in unstable markets. Qualitative findings provided deeper insights into emotional triggers and decision-making tendencies. This study highlights the need for financial literacy programs, behavioural training, and regulatory measures to address biases and improve rational decision-making. Future research can explore AI-driven decision tools to mitigate biases and enhance investment strategies.