Behavioural Finance: Reflexive and Reflective Processes in Investment Decisions

The traditional finance theory has been based on the assumption that an investor is a rational being who takes decisions based on full information to maximize his utility. This classical model assumes the market participants are perfectly and fully informed and can make objective decisions in a logical manner for the efficient functioning of financial markets. In practice, however, empirical studies find that investors make irrational investment decisions due to psychological biases, emotions, and cognitive limitation. This area is in the center of Behavioural finance because it deals with the issue of how psychological elements can influence investment decisions and their implications for market results