Analyzing the Effects of Cognitive and Emotional Behavioural Biases on Individual Equity Investors' Investment Choices

Abstract

The aim of the study, Investment choices that have historically been made using rational economic models are coming under increasing pressure from behavioral finance theories that take psychological factors into account.  “This study examines how individual equity investors' investment decisions are influenced by behavioral biases that are both cognitive and emotional. The research examines how biases like overconfidence, anchoring, representativeness, loss aversion, herding behavior, and regret aversion affect investor behavior and frequently result in less-than-ideal outcomes, drawing on theories like Prospect Theory and Heuristics and Biases. Using structured surveys, a quantitative, cross-sectional research design was used to gather information from 200 individual stock market participants. The associations between behavioral biases and investment decision-making were examined using SmartPLS and structural equation modeling (SEM).  All of the cognitive and emotional biases that were examined had a statistically significant effect on investment decisions, according to the results, with financial literacy, herding behavior, and representativeness bias showing the biggest effects. High factor loadings, composite reliability, and average variance extracted (AVE) values all showed that the measurement model was highly valid and reliable.  The Heterotrait-Monotrait ratio and the Fornell-Larcker criterion were used to verify discriminant validity.  The results emphasize how important it is to raise awareness of these biases and develop mitigation techniques, particularly for individual investors. This study highlights the value of incorporating psychological insights into financial education, policy-making, and advisory services while also adding to the expanding corpus of knowledge in behavioral finance.  By addressing behavioral distortions, it also provides policymakers and financial advisors with useful implications for improving investor decision-making and advancing market efficiency”.