The Potential Repercussions of Psychological Bias and Stock Market Abnormalities on Investor Sentiments

Behavioural finance is the body of knowledge which helps analyse, understand and improve how ordinary people make financial and investment decisions. And how their psychological, cognitive and emotional factors impact their life, investment and financial choices. In growing economies like India, where retail investor activities are on the rise, the behavioural determinant of investor sentiment is becoming increasingly significant for market practitioners and policymakers. In this study, we address the influence of behavioural or psychological biases on the sentiment of retail investors in the Indian stock market. Furthermore, it highlights the cognitive and emotional factors. A systematically prepared questionnaire was used to collect the primary data with the help of convenience sampling. Based on the empirical findings, it has been recognized that behavioural biases determine investor sentiment and cause them to deviate from a rational decision-making based on information. Overconfidence, herd behaviour, and loss aversion were the most influential behavioural biases, among other which determined investment behaviour affecting investors to be more susceptible to market noise and trading on emotion and making wrong investment decisions. The findings also indicate that retail participation driven by sentiment can improve market liquidity and boost optimistic market trends by rising trading activities. Nevertheless, overreliance on emotion-based investment choices heights volatility and distorts prices. In other words, prices do not behave as normally expected during stressful or uncertain environments. The results below suggest that educating investors about cognitive biases through financial literacy and investor education programs can help in avoiding negative outcomes associated with them and enhance decision quality. The research aids in the understanding of investors’ behaviour by enhancing behaviour awareness and rational investment practices. It has real-world possibilities for investors, public agencies, financial entities, regulators and government authorities that wish to enhance market efficiency, investor welfare and long-term financial stability.