Behavioural Finance: How Emotions Influence Financial Decisions: For Youth

Abstract

This paper explores how behavioural finance offers a more accurate explanation of financial decision-making than traditional models, with particular attention to the experiences of today’s youth. Classical finance assumes rational, utility-maximising investors and informationally efficient markets, yet persistent anomalies, such as excess volatility, momentum, bubbles, and the disposition effect, demonstrate that real behaviour often departs from these assumptions. Behavioural finance addresses these gaps by incorporating bounded rationality, heuristics, emotions, and social influences that shape individual choices and market outcomes. Contemporary research highlights two central mechanisms: psychology-driven biases such as overconfidence, loss aversion, anchoring, and representativeness; and limits to arbitrage, which restrict the ability of rational traders to immediately correct mispricing. Together, these factors explain why sentiment, attention, and narratives increasingly move markets. The paper links these theoretical foundations to the evolving financial behaviour of young people. Adolescents and young adults are entering financial markets earlier, supported by digital payment systems, mobile investing platforms, and social-media financial content. Yet global and national assessments show that youth financial literacy remains uneven, with many struggling with numeracy, budgeting, and risk evaluation. Digital access provides opportunities for saving, participation, and entrepreneurship, but also heightens exposure to impulsive trading, crypto speculation, FOMO, and influencer-driven decisions. By connecting behavioural finance insights with contemporary youth financial trends, this paper underscores the need for strong early-stage financial capability. Evidence-based education and responsible digital-finance design are essential for improving decision-making, strengthening resilience, and supporting long-term financial well-being and economic participation.