The Influence of Cognitive Biases on Investor Behavior in Periods of Economic Instability

Abstract

Global economic uncertainty often triggers substantial shifts in investor behavior. In this context, behavioral finance theory explains that investment decisions are not solely driven by rational analysis but are also shaped by psychological factors and cognitive biases. This study aims to analyze the transformation of investor behavior during periods of economic uncertainty using a library research approach. The findings reveal that cognitive biases such as overconfidence, confirmation bias, and loss aversion play a crucial role in driving irrational investment behavior. When uncertainty intensifies, investors tend to become more pessimistic and exhibit heightened sensitivity to negative information compared to positive signals, leading to suboptimal asset allocation decisions. Moreover, market fluctuations are frequently influenced by emotional responses rather than fundamental evaluations, reflecting bounded rationality in financial decision-making processes. This study highlights the necessity of integrating psychological insights into investment strategies and policy frameworks to enhance adaptability in volatile market conditions. By understanding behavioral tendencies, investors, policymakers, and financial institutions can develop more resilient strategies that account for the complexities of human behavior in financial decision-making.