Behavioral Finance and Market Anomalies: Explore How Cognitive Biases and Emotional Factors Influence Investor Behavior and Lead to Market Anomalies

Abstract

This study explores the complex interplay between extrinsic and intrinsic factors influencing human behavior in various contexts, including the stock market, with a focus on the impact of cognitive and emotional biases on investment decisions. Against the backdrop of modern finance theories, which assume market efficiency and rational investor decision-making, this research aims to investigate the effects of overconfidence, loss aversion, and herd behavior on investor choices. Utilizing a mixed-methods approach, combining theoretical frameworks from prospect theory and behavioral finance, this study examines the ways in which these biases lead to suboptimal decisions, undermine market efficiency, and contribute to market trends and anomalies, including momentum effects and bubbles. The key findings of this research reveal that cognitive and emotional biases significantly impact investment decisions, and that understanding and regulating these biases can improve market predictions and regulation. The study's policy and business implications are significant, as its insights can inform the development of more effective investor education programs, risk management strategies, and regulatory frameworks, ultimately leading to more informed decision-making and stable financial markets.