The Future of Behavioural Finance in a Sustainable World

Kok Loang Ooi (), Norazlin Binti Ab Aziz () and Wee Yeap Lau ()
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Kok Loang Ooi: Universiti Malaysia
Norazlin Binti Ab Aziz: Universiti Malaysia
Wee Yeap Lau: Universiti Malaysia

Chapter Chapter 17 in Following the Crowd: Psychological Drivers of Herding and Market Overreaction, 2025, pp 221-231 from Springer

Abstract: Abstract This chapter explores the evolving contours of behavioural finance within the context of a sustainability-driven investment environment, asserting that traditional models of investor decision-making must be reoriented to accommodate the growing influence of ESG (environmental, social, and governance) imperatives. At its core, the chapter examines how cognitive biases, heuristics, and emotional framing continue to shape ESG investment behaviour, often in ways that both enable and hinder rational capital allocation. It contends that as sustainability becomes a central axis in portfolio construction, financial policy, and corporate governance, behavioural finance must integrate new variables that reflect ethical preferences, long-term risk awareness, and the complexity of ESG signals. The chapter presents four interlinked contributions to this emerging field. First, it analyses the role of artificial intelligence (AI) and digital platforms in mitigating or amplifying behavioural distortions, particularly through algorithmic nudging, predictive analytics, and sentiment-based investment tools. Second, it re-evaluates classical behavioural finance theories such as prospect theory, mental accounting, and overconfidence bias in light of sustainability-oriented market behaviours. Third, it emphasises the importance of financial literacy and targeted investor education in shaping ESG-conscious decision-making, particularly across generational cohorts and socio-economic strata. Fourth, it considers the application of behavioural insights in ESG strategy design and policy development, including the use of nudges, defaults, and regulatory interventions to encourage sustainable investment behaviours. The chapter argues for a forward-looking behavioural finance paradigm that is empirically grounded, ethically responsive, and institutionally attuned to the challenges and opportunities of green finance.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-981-95-0792-4_17

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DOI: 10.1007/978-981-95-0792-4_17

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