The Psychology of Decision-Making: How Emotions Influence Financial Choices
Main Article Content
Keywords
behavioral economics, decision-making, emotional bias, financial psychology, risk perception
Abstract
Financial decisions are often assumed to be based on rational thinking and logical calculation. However, behavioral economics and psychology reveal that human emotion plays a crucial role in shaping financial judgment and market behavior. This paper explores how emotions—such as fear, anxiety, and overconfidence—affect individual and collective financial decision-making. Drawing on key theories in behavioral economics, including Prospect Theory and the concept of bounded rationality, this study analyzes the psychological factors that drive risk-taking, saving behavior, and investment choices. The paper also reviews the impact of emotional reactions during market fluctuations, demonstrating how panic selling or euphoric buying can amplify volatility. Moreover, it discusses how understanding emotional bias can lead to more effective financial education and policymaking. By integrating economic models with psychological insight, this study highlights the need for a balanced approach to decision-making that acknowledges both logic and emotion as essential components of human behavior in financial contexts.
References
- [1]Almansour, A. (2023). Behavioral finance factors and investment decisions. Cogent Economics & Finance, 11(1), 2239032. https://doi.org/10.1080/23322039.2023.2239032
- [2]Annapurna, K., Deepa, K., & Ramaswamy, R. (2024). The influence of emotional intelligence and behavioural biases on investment behaviour. Journal of Behavioral and Experimental Economics, 114, 102003. https://doi.org/10.1016/j.socec.2024.102003
- [3]Barber, B. M., & Odean, T. (2014). Overconfident investors, predictable returns, and excessive trading. National Bureau of Economic Research. https://doi.org/10.3386/w21945
- [4]Herathmenike, H. (2025). Unpacking investor psychology: A systematic review and meta-analysis. Frontiers in Behavioral Economics, 2(1), 10576316. https://pmc.ncbi.nlm.nih.gov/articles/PMC12576316
- [5]Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263–292. https://doi.org/10.2307/1914185
- [6]Lo, A. W. (2012). Adaptive markets: Financial evolution at the speed of thought. Princeton University Press.
- [7]McKinsey & Company. (2025). The value-now consumer: Making sense of U.S. consumer sentiment and spending. https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/the-value-now-consumer
- [8]Numerator. (2025). 2025 Consumer trends: Annual visions report. https://www.numerator.com/press/2025-consumer-trends-numerator-publishes-annual-visions-report
- [9]Salsify. (2025). How consumer buying behavior is changing in 2025. https://www.salsify.com/blog/how-consumer-buying-behavior-is-changing-in-2025
- [10]Shiller, R. J. (2019). Narrative economics: How stories go viral and drive major economic events. Princeton University Press.
- [11]World Bank. (2025). Global economic prospects: January 2025 update. https://www.worldbank.org/en/publication/global-economic-prospects
Article Sidebar
This work is licensed under a Creative Commons Attribution 4.0 International License.