Financial Market Transition from Traditional Finance to Behavioural Finance

Abstract

In order to explain why people make irrational financial decisions, behavioural finance is a new field of research in finance that combines behavioural and cognitive psychological theory with traditional economics and finance. Traditional finance makes the assumption that an investor is a logical individual who can evaluate all information objectively. Even though behavioural finance is based on actual experience, it is irrational and an investor's emotions do influence the type of investments he makes. According to traditional finance, the market is efficient and reflects the underlying worth of the financial market. Yet, behavioural finance holds that market volatility is the cause of market anomalies. Every behavioural finance model starts with the idea of independent investors who are prone to bad judgement and poor decision-making. In order to enable people from the country's many financial systems grasp the cutting-edge methods of portfolio design based on behavioural tendencies, behavioural finance has produced a variety of models and theories. For this study data have been collected from various secondary sources like journals, articles, magazines, books etc. This study’s major goal is to investigate how psychological factors affect people's investment behaviour. It represents how behavioural finance helps to close the gaps between conventional financial theories and real-world market circumstances. The study's findings will aid investors in making better decisions by highlighting the most crucial behavioural finance component.