Individual’s Psychology and Investment Decision Dynamics: A Systematic Literature Review

Abstract

Investment decision-making has been traditionally explained through the classical financial theories, which assume that, individuals are rational and they always seek to maximise the expected returns, based on complete information. However, increasing evidence from the behavioural finance further suggests that investment decisions are often influenced by the psychological, emotional and cognitive factors (Abideen et al. 2023). These factors further lead the individuals to deviate from the rational behaviour. Different factors, namely, overconfidence, loss aversion, herding behaviour, risk perception and emotional responses have significantly shaped the way individuals could evaluate the investment opportunities, while respond to the market uncertainties. These psychological influences have become increasingly relevant in the dynamic financial environment at present, which is characterised by the rapid technological advancements, increased the access to the financial information, digital trading platforms, while heightened the market volatility.