The influence of psychological factors on the investors’ trading and investment decisions and its subsequent impact on capital market is studied with the concept of behavioural finance. Behavioral finance, which is a recently popularized paradigm in the financial market analysis, analyses the influence of human psychological factors on the financial market’s evolution. In other words, behavioral finance analyses the financial market inefficiency in the light of the psychological perspectives and theories. The psychological principles of behavioral finance include the analysis of various factors, such as overconfidence, heuristics and biases, emotion and social forces, etc. This analysis is helpful in understanding the ability of the investor to temper the irrational components of investment decisions while satisfying their individual requirements and preferences. However, the traditional models failed in explaining and solving the anomalies of the financial market and this failure cemented the application of the behavioral finance model, which clearly explains the motivation behind the individual in taking a specific decision regarding the investment. This paper is giving an insight into the investment decision making and trading behaviour of individuals is influenced by the psychological factor which also states that the performance of portfolio and its implications on equity market is also affected.
Psychological factors, investment decisions, equity market and investor’s trading
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