Behavioral Biases and Investment Decisions: A Study on Individual Investors in the Indian Stock Market

Abstract

Traditional financial theories assume that investors are rational and make decisions based on logical evaluation of available information. However, the emergence of behavioral finance has challenged this notion, revealing that psychological factors and cognitive biases often drive investment behavior. This study investigates the impact of behavioral biases—such as overconfidence, herd behavior, anchoring, and loss aversion—on the investment decisions of individual investors in the Indian stock market. The paper uses both primary and secondary data to analyze how these biases influence portfolio choices, risk-taking, and return expectations. Survey responses from retail investors across major cities in India provide insight into real-world investor psychology. The findings reveal that behavioral biases significantly distort rational financial decision-making, often resulting in suboptimal outcomes. Understanding these biases is essential for financial advisors, regulatory bodies, and educational institutions to design interventions that promote better investment behavior and safeguard investor interests.