Behavioral Biases in Financial Markets: A Review with Future Research Directions

Traditional financial management assumes rational investors and efficient markets, but increasing empirical evidence shows that investor decisions are often influenced by psychological and emotional factors, leading to the emergence of behavioral finance. This study systematically reviews 40 scholarly sources to examine key behavioral biases and their impact on investment decision-making across developed and emerging markets. Using major academic databases and a structured literature review matrix, the study analyzes research chronologically, geographically, methodologically, and thematically. The findings identify overconfidence, herding, disposition effect, heuristics, and mental accounting as the most prominent biases, shaped by demographic, contextual, and cultural factors. Behavioral biases are found to be more pronounced in developing economies and significantly affect trading behavior, portfolio performance, and market efficiency. Despite extensive research, gaps remain in longitudinal, experimental, and cross-country studies. This review consolidates existing evidence, highlights research gaps, and offers insights for researchers, practitioners, and policymakers to improve investment decision-making.