Effect of Loss Aversion on Investor Behaviour During Market Downturns

Abstract

Cognitive biases, and in particular loss aversion, greatly influence investor behavior. This is a term used in relation to the propensity by individuals to shun away losses as opposed to accepting the same benefits. This paper examines the issue of loss aversion on investor decision-making in times of market crash. It demonstrates the effect of psychological biases on financial decisions. This study employs a structured questionnaire and statistical tests such as ANOVA and t-tests to establish the patterns in the investor responses, risk tolerance and portfolio modifications during economic downturns. The research is based on a wide range of demographics, which emphasizes the perception and reactions of various groups of investors on the subject of losses. The results indicate that loss aversion leads to the use of conservative investment techniques, periodic panic-selling events and difficulty in rejoining the market following a decline. The findings underscore the relevance of investor education and behavioral finance plans in the reduction of irrational decision-making. The paper ends by advising the financial advisor and the policymaker to develop interventions that facilitate rational investment action in the face of market volatility. ABSTRACT: How do investors behave? Cognitive biases, Loss aversion, Investor decision-making, Market downturns, Psychological biases, Risk tolerance, Portfolio changes.