Investors’ Risk Aversion Preference from the Perspective of Behavioral Finance

Abstract

Behavioral finance breaks through the limitations of the “rational man” assumption in traditional financial theory, providing a more realistic perspective to explain irrational behaviors in the market (such as “herd behavior” and “disposition effect”) and abnormal phenomena like stock prices deviating from fundamentals. This discipline incorporates psychological factors such as cognitive biases and emotional fluctuations into its analytical framework, with investors’ risk-averse preferences being particularly crucial. These preferences directly influence their risk-return trade-offs and, through the aggregation effect of individual decisions, profoundly shape market volatility and operational efficiency.  This paper systematically reviews the relevant theories and empirical studies on investor risk aversion preference in the field of behavioral finance, exploring the topic from multiple dimensions: at the level of influencing factors, it analyzes the effects of individual cognitive biases, emotional states, and market environments on risk aversion preferences; it also examines in depth how risk aversion affects investment decisions and the resulting market anomalies; finally, it investigates the behavioral finance explanations for fluctuations in risk aversion preferences, interpreting investors’ tendencies and changes in risk aversion from a behavioral finance perspective.  The aim of this paper is to comprehensively analyze the significance and practical value of risk aversion preferences within the framework of behavioral finance, deepening the understanding of investors’ decision-making logic, and providing practical references for investors to optimize asset allocation and improve decision-making rationality, as well as for market participants to more accurately grasp market operating rules and maintain market stability.