Abstract. This paper examines the critical role of the behavioural perspective in understanding financial decision-making, emphasizing the interplay of cultural and psychological factors. Through our analysis of cultural influences on financial strategies, loss-averse behaviours, it is shown how behavioural factors shape financial outcomes. Supported by empirical research on behavioural biases, demographic influences, and overconfidence, this study argues that integrating the behavioural perspective into financial analysis enhances the understanding of market dynamics and improves decision-making. The findings underscore the necessity of considering psychological and cultural dimensions to address limitations in traditional rational models and mitigate financial risks.
Summary of the main research material.
Financial decision-making has traditionally been anchored in classical models of rationality, presuming individuals and markets operate with perfect logic to maximize outcomes [3, c.13]. However, real-world behaviour often deviates, driven by a complex interplay of cognitive biases, emotions, and external influences. This exploration introduces a behavioural finance perspective, illuminating how psychological factors—such as loss aversion, overconfidence, and framing—shape investment choices and managerial strategies [5, c.10]. Equally critical are cultural influences, which mold risk appetites, trust in financial systems, and approaches to uncertainty across diverse global contexts. By integrating these psychological lenses, this discussion sets the foundation for understanding the nuanced, human-driven dynamics of financial decision-making, challenging conventional assumptions and advocating for a more holistic framework in finance research and practice.
Wang’s study on behavioural biases highlights the impact of loss aversion, overconfidence, and framing bias on investment decisions [6, c.3]. Loss aversion leads investors to hold losing assets too long, amplifying losses. Overconfidence prompts excessive trading, increasing transaction costs and reducing returns. Framing bias demonstrates how the presentation of information influences risk-taking behaviours. These biases challenge the predictive power of rational models, underscoring the need for behavioural frameworks to explain investor behaviour accurately.
Research by Salamouris explores how gender, age, and income shape risk perception in investment decisions [2, c.4]. Men tend to exhibit higher risk tolerance than women, influencing their preference for riskier investments. Younger investors, with longer investment horizons, are more risk-tolerant, while older investors prioritize capital preservation. Higher-income individuals are more comfortable with risk due to their financial cushion. These demographic differences necessitate tailored financial strategies to optimize investment outcomes across diverse groups.
Daniel and Hirshleifer’s research on overconfidence reveals its impact on market inefficiencies [1, c.2]. Overconfident investors trade excessively, contributing to short-term momentum and long-term price reversals. This behaviour, coupled 4 with limited attention, leads to mispricing, as seen in the accrual anomaly, where investors overvalue firms with high accruals. These findings highlight the behavioural perspective’s role in explaining market anomalies that rational models cannot address.
Simon’s analysis of intuition and emotion in managerial decision-making emphasizes their influence in unstructured financial contexts [3, c.5]. Intuitive judgments, shaped by experience, can be effective, but emotional stress often leads to counterproductive decisions, such as procrastination or blame-shifting. These emotional responses exacerbate decision-making challenges under uncertainty, reinforcing the need to account for psychological factors in financial analysis.
Cultural norms significantly shape financial behaviours and corporate strategies across global markets. In high uncertainty avoidance cultures, such as Germany, firms tend to prioritise low-risk investments and stable financial strategies, reflecting a preference for security [4, c.2]. Conversely, in individualistic and low uncertainty avoidance cultures, such as the United States, there is a greater propensity for risk-taking and entrepreneurial ventures, leading to more aggressive investment strategies. These cultural differences influence risk tolerance, investment preferences, and market behaviours, necessitating culturally sensitive approaches in global finance. Understanding these dynamics enables financial institutions to tailor strategies to diverse markets, enhancing cross-cultural cooperation and decision-making efficiency.
The behavioural perspective addresses critical gaps in traditional financial models by incorporating psychological and cultural factors. This analysis demonstrates how cultural norms, loss aversion, and overconfidence drive financial outcomes, often with catastrophic consequences. By integrating the behavioural perspective, financial analysts and policymakers can develop strategies to mitigate biases, enhance financial literacy, and promote ethical decision-making. This approach not only improves individual and institutional outcomes but also contributes to more efficient and resilient financial markets.
Behavioural finance research reveals how psychological biases and demographic factors disrupt the assumptions of rational financial models [6, c.3]. Wang’s study highlights loss aversion, overconfidence, and framing bias as critical influences on investment decisions. Loss aversion leads investors to hold losing assets too long, amplifying losses, while overconfidence drives excessive trading, increasing costs and reducing returns. Framing bias shows how information presentation alters risk-taking behaviour. Similarly, Daniel and Hirshleifer link overconfidence to market inefficiencies, such as short-term momentum, long-term price reversals, and the accrual anomaly, where overvalued firms with high accruals reflect mispricing. Salamouris’ work further demonstrates how gender, age, and income shape risk tolerance: men and younger investors favor riskier assets, while women, older individuals, and those with lower incomes prioritize safety. These findings underscore the necessity of behavioural frameworks to explain investor behaviour and market anomalies that traditional models fail to address.
Cultural norms and emotional factors further complicate financial decision-making, necessitating tailored global strategies. Simon’s analysis shows that intuition, honed by experience, can aid managerial decisions in uncertain contexts, but emotional stress often triggers procrastination or blame-shifting, impairing outcomes [5, c.7]. Culturally, high uncertainty avoidance societies like Germany prioritize low-risk, stable investments, reflecting a preference for security, while individualistic, low uncertainty avoidance cultures like the United States embrace riskier, entrepreneurial ventures. These cultural differences shape risk tolerance and investment preferences, highlighting the need for culturally sensitive financial approaches. By integrating psychological, demographic, and cultural insights, behavioural finance offers a robust lens for understanding complex financial behaviours, enabling academics and practitioners to enhance decision-making across diverse markets.
Conclusion. The behavioural perspective is indispensable for understanding financial decision-making. Cultural influences, psychological biases, and demographic factors profoundly shape investor behaviour, addressing limitations in rational models. Future research should focus on developing interventions to mitigate behavioural biases and enhance financial education, ensuring more informed and ethical financial practices. Adopting this perspective will lead to more accurate analyses and robust strategies in both academic and practical financial contexts.
References:
1. Daniel K., Hirshleifer D. Overconfident investors, predictable returns, and excessive trading // Journal of Economic Perspectives. — 2015. — Vol. 29, No. 4. — pp. 61–88.
2. Salamouris I. S. Effect of gender, age, and income on investors’ risk perception in investment decision: A survey study [Electronic resource] / I. S. Salamouris. — 2019. — Available at: https://www.researchgate.net/publication/335856704.
3. Simon H. A. Making management decisions: The role of intuition and emotion // Academy of Management Perspectives. — 1987. — Vol. 1, No. 1. — pp. 57–64.
4. Thurik R., Dejardin M. The impact of culture on entrepreneurship [Electronic resource] / R. Thurik, M. Dejardin. — 2013. — Available at: https://www.researchgate.net/publication/376131619.
5. Tittle C. R. Control balance: Toward a general theory of deviance / C. R. Tittle. — Boulder, Colorado : Westview Press, 1995. — 336 p.
6. Wang Y. Behavioral biases in investment decision-making [Electronic resource] / Y. Wang. — 2023. — Available at: https://www.researchgate.net/publication/376131619.
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Науковий керівник: Стеценко Богдан Станіславович, професор, декан факультету фінансів КНЕУ імені Вадима Гетьмана
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