The evolution of financial decision-making: From traditional finance to behavioural perspectives
Keywords:
Financial Decision-Making, Traditional Finance, Behavioural Finance, Rationality, Cognitive Biases, Investor BehaviourAbstract
Financial decision-making has traditionally been examined through the assumptions of rationality, complete information, risk evaluation and wealth maximization. Classical financial theories provided the foundation for understanding how individuals and organizations make investment, financing and portfolio decisions. However, the behaviour of financial decision-makers frequently differs from the predictions of purely rational models. Investors may rely on heuristics, demonstrate overconfidence, react differently to gains and losses, follow other market participants and make decisions influenced by emotions and social factors. These limitations contributed to the emergence and development of behavioural finance as an important extension of traditional financial theory. This study examines the evolution of financial decision-making from traditional finance to behavioural perspectives through a theoretical and literature-based approach. The paper reviews the foundations of rational financial decision-making and subsequently examines behavioural perspectives, cognitive biases, investor psychology, market sentiment and social influences. It also considers the emerging influence of digital finance, fintech and rapid information dissemination on contemporary financial decisions. The literature suggests that traditional financial theories remain important for explaining the normative dimensions of financial decision-making, but behavioural perspectives provide additional explanations for actual investor behaviour and market outcomes.
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