The Role of Behavioral Biases in Shaping Investment Decisions: Evidence from the Indian Stock Market

Abstract

This study examines the significant influence of behavioural finance on investment decision making in the stock market, challenging the conventional Efficient Market Hypothesis (EMH). This study conducts a comprehensive evaluation of contemporary research papers and a structured behavioural analysis to identify the predominant cognitive biases specifically overconfidence, representativeness, price anchoring, gambler’s Fallacy, availability, mental accounting, regret aversion and loss aversion. The primary objective of this research is to examine and empirically demonstrate the impact of cognitive biases on stock market investment decisions in major cities of Gujarat. The study employs a questionnaire-based survey of 300 respondents, and the data are analyzed using ADF, correlation, and regression techniques. The findings reveal that majority of cognitive biases have a significant effect on investment decisions in the Indian stock market. The study provides valuable implications for individual investors, financial advisors, and fintech developers striving to promote rational decision-making in markets that are progressively influenced by investor sentiment.