Human behaviour and personal investment decision making can influence the trading results of a stock market and therefore, it is relevant to discuss the role of behavioural finance in the investment decisions at stock market. With this background, this paper attempts to discuss the influence of behavioural finance on the stock market performance in general and on the market bubbles and crashes in particular. The essay takes a descriptive approach wherein the present literature on these issues is mainly covered and an attempt is made to incorporate the relevant theories of behavioural finance.
Behavioural finance is one of the fast developing areas in the field of financial literature. This field of knowledge has developed a number of theories and theoretical models to explain the behavioural aspects of investment decision making. Most of the theories and models have been developed by borrowing insights from other branches such as psychology, sociology, and other behavioural sciences to analyze the behavioural aspects of investors and its influence on stock market performance. A good number of studies have been undertaken across the world to evolve behavioural theories and models so as to explain the association between the investor psychology and stock market performance. This area of knowledge tries to answer the influence of individual and collective behaviour exhibited by investors on the market prices. The rational finance which stems from neoclassical economics postulates that the economic decisions of investors are determined by the principles of perfect self-interest, perfect rationality, and perfect information (Ware2000). This is not going to be a logical view point as described by behavioural finance. Behavioural finance states that people are neither perfectly rational nor perfectly irrational; they possess diverse combinations of rational