Behavioural Biases and Stock Market Price Movements: An Empirical Analysis of Investor Decision-Making in the Indian Equity Market

Abstract

The conventional theory of finance is founded substantially upon the assumption that investors process information rationally, make utility-maximising decisions, and cause security prices to reflect available information with reasonable efficiency. Actual financial markets, however, repeatedly demonstrate patterns of investor behaviour that cannot be explained adequately through rational-choice models alone. Investors are human decision-makers whose judgments are affected by cognitive limitations, emotional responses, social influence, past experiences, reference points, and subjective perceptions of risk. Behavioural finance emerged to explain these departures from classical rationality and to examine their implications for asset prices, trading volume, volatility, market efficiency, and investment performance. The present article critically analyses the influence of behavioural biases on investment decision-making and stock-price movements with particular reference to the Indian equity market. It concentrates on overconfidence, loss aversion, disposition effect, anchoring, representativeness, availability bias, herd behaviour, confirmation bias, self-attribution, regret aversion, mental accounting, recency bias, and fear of missing out. Rather than generating artificial primary data, the article adopts an evidence-based empirical synthesis of established behavioural-finance research, Indian investor studies and official securities-market evidence. The analysis demonstrates that behavioural biases influence not merely the portfolio choices of individual investors but, when sufficiently correlated across market participants, can contribute to abnormal trading volume, momentum, reversals, price overshooting, volatility clustering and temporary departures of market prices from fundamental value. Indian evidence is particularly significant because rapid digitalisation, low-cost brokerage, mobile trading and growing retail participation have altered the composition and speed of securities-market participation. SEBI's recent evidence that a substantial majority of individual intraday and equity-derivatives traders incur losses illustrates the importance of examining the psychological processes accompanying speculative participation. The article argues that behavioural finance should not be understood as a rejection of market efficiency but as a complementary framework explaining why efficiency may vary across investors, securities, market conditions and time periods. The study concludes that investor education should move beyond conventional financial literacy toward behavioural literacy, while regulators, intermediaries and digital trading platforms should incorporate behavioural insights into investor-protection architecture.