Understanding Risk Tolerance and Investors’ Psychology: A Behavioral Finance Approach to Decision-Making Under Market Volatility and Uncertainty

Abstract

Background – Behavioral finance has sufficient knowledge on cognitive biases in investment decision-making but there is absence of fully integrated frameworks that incorporated the interaction between an individual risk tolerance and various psychological biases during times of market instability

Objectives – This study explored the psychological determinants of panic selling behavior among individual investors during periods of market volatility. Specifically, it examined how behavioral factors such as risk tolerance, overconfidence, and loss aversion influenced investment decisions under stress.

Methodology – Utilizing a mixed-methods research design, the study combined quantitative survey data with qualitative interviews to provide both statistical and experiential insights. The quantitative component employed structured questionnaires to measure behavioral traits and their relationship with panic selling, while the qualitative phase captured investors' narratives to explore emotional and cognitive responses to market declines.

Expected Results – Findings revealed that low risk tolerance and high loss aversion significantly predicted panic selling, while moderate overconfidence appeared to serve as a protective factor, enabling investors to remain committed to long-term strategies. Thematic analysis of interviews highlighted emotional triggers, peer influence, and cognitive distortions as recurring patterns among panic sellers. These results underscore the importance of behavioral awareness in financial decision-making and suggest that emotional regulation and behavioral coaching should be integrated into investor education programs.