The Influence of COVID-19 and Subsequent Events on the Decision-Making of Retail Investors in Kingdom of Bahrain: A Behavioral Finance Analysis

The debate surrounding Behavioral Finance versus Traditional Finance is of great significance in the field of finance due to their divergent and contentious viewpoints. This study aims to examine the contrasting perspectives by investigating the period spanning from 2020 to 2023, which was marked by a series of influential events impacting financial markets and investor decision-making. Specifically, the study seeks to explore the interplay between Behavioral Finance and Traditional Finance considering factors such as the COVID-19 pandemic, geopolitical events (e.g., the Russian War), and economic policy decisions (e.g., interest rate fluctuations). To achieve this, the research examines price movement charts, historical financial data, and pertinent economic indicators for six different asset classes including equities, cryptocurrencies, and exchange-traded funds (ETFs) with a range of risk profiles. The chosen period, which runs from January 2020 to January 2023, allows for the analysis of the impacts of major occurrences like COVID-19, changes in economic policies, and geopolitical conflicts. The application of behavioral finance theories, biases, and models is the main methodology used; classical finance ideas are occasionally cited when necessary. The results of the study show a strong inverse relationship between traditional finance and behavioral finance. Moreover, it establishes a robust causal relationship between COVID-19, economic policy decisions, geopolitical changes, and their significant impact on the decision-making processes of retail investors. It has been demonstrated that these occurrences set off behavioral biases and instincts that affect how investors make decisions. This study sheds light on the intricate dynamics of financial markets by exploring the relationship between traditional finance and behavioral finance and the impact of events on investor behavior. This enhances our comprehension of how psychological aspects and outside circumstances influence investment choices, highlighting the shortcomings of conventional financial models.