Behavioral Economics in Strategic Investment Decision-Making: A Critical Review

Abstract

Behavioral economics has nowadays become an important framework to understand decision-making processes underlying investment strategies. The present critical review hereby assesses how behavioral economics impacts the strategic decision of investment by highlighting psychological biases and heuristics caused by which the investor allocates capital. While traditional economic model of decision-making depicts investment decisions as being rational, behavioral economics states that cognitive biases like overconfidence, aversion to loss, and anchoring can affect them. Through review of previous works on investor behavior, the study looks into how these biases affect individual and institutional investors toward making subpar investment choices and creating inefficiencies in the market. This study further considers how behavioral economics can be employed to improve investment decision strategies and better financial outcomes. This work proceeds to expand the understanding of the psychological factors that influence strategic investment decisions and sets a foundation for future in-depth research into behavioral finance.