Abstract Investment decisions are among the most important financial decisions made by individuals for achieving long-term financial security and wealth creation. Traditional financial theories assume that investors are rational and always make decisions that maximize utility. However, practical observations reveal that investors often behave irrationally due to emotions, cognitive limitations, and psychological biases. Behavioral finance emerged as an interdisciplinary field combining finance and psychology to explain these deviations from rational behavior. This conceptual paper examines the role of behavioral finance in influencing individual investment decisions. The study reviews major behavioral theories and biases such as overconfidence, loss aversion, anchoring, herding behavior, mental accounting, representativeness, and confirmation bias. The paper also presents a comprehensive review of literature and proposes a conceptual framework illustrating the relationship between behavioral biases and investment decisions. The study concludes that understanding behavioral finance can help investors recognize irrational tendencies, improve decision-making, and enhance investment performance.
Ramesh et al. (Sun,) studied this question.