Behavioral Finance: The impact of Investor Expectations on the Financial Markets

Abstract

This paper explores the profound impact of investor behavior, driven by cognitive biases such as loss aversion, the framing effect, and the endowment effect, on financial markets. The presence of these biases introduces market anomalies and long-term reversals, challenging the efficiency of the market. While valuable insights are gained from studying investor behavior, limitations must be considered. Individual variations in psychological traits and decision-making processes may render these theories inapplicable to all investors. Historical data, a primary tool for analyzing behavior, may not reliably predict future market trends. Quantifying cognitive biases and measuring their impact presents challenges due to the subjective nature of psychological factors. Additionally, limited sample sizes in some studies may compromise the generalizability of findings. Despite these constraints, understanding investor behavior remains paramount for unraveling market dynamics and shaping informed investment strategies. The paper underscores the need to acknowledge these limitations while appreciating the nuanced role of cognitive biases in financial markets.