Emotional Finance And Investment Decisions: A Comprehensive Review Of Psychological Influences And Behavioral Patterns

Abstract

  Emotional finance, an emerging branch within behavioral finance, investigates how investor emotions profoundly influence financial decision-making, contrasting with traditional finance theories that assume rationality in market behavior. This review synthesizes insights on how psychological drivers—such as fear, overconfidence, and optimism—significantly impact investor behavior and contribute to market volatility, frequently overriding logical and rational thinking. Conducted from July 2018 to October 30, 2024, the literature search spanned databases including IEEE, Scopus, Springer, Elsevier, and Web of Science, yielding 900 initial studies, of which 40 met strict inclusion criteria focused on the emotional and behavioral aspects of investment decision-making. This review is guided by two key objectives. The first objective is to understand the relevance and role of emotional finance across diverse investor profiles, examining how individual differences in risk tolerance, experience, and background affect susceptibility to emotional influences. The second objective is to investigate the specific psychological and emotional factors that drive investment decisions, with a focus on the mechanisms through which emotions like fear, greed, and confidence shape risk perception, trading frequency, and response to market dynamics. Core behavioral concepts, including mental accounting, herding behavior, and loss aversion, are explored alongside methodologies such as sentiment analysis and neuro-finance, which serve as tools to quantitatively assess emotional responses within financial contexts. Through this comprehensive review, consistent themes and emerging trends are identified, providing a nuanced understanding of emotional finance and its implications for investment decision-making. This study underscores the importance of addressing emotional biases to enhance financial outcomes and suggests avenues for future research aimed at mitigating the psychological influences that challenge rational investment practices.