Financial Resilience and Risk Optimization in Emerging Economies: A Behavioural Finance Perspective

Abstract

This paper examines the interlinkages between behavioural finance, financial resilience, and risk-optimization strategies in emerging economies. Building on recent empirical and theoretical work, the study synthesizes how investor and managerial cognitive biases, social dynamics, and institutional constraints shape resilience at household, firm, and systemic levels. We develop a conceptual framework that integrates behavioural channels (heuristics, loss aversion, overconfidence, herding) with structural determinants of resilience (financial depth, market liquidity, macroeconomic policy credibility and regulatory buffers). Using this framework, the paper identifies mechanisms through which behavioural biases amplify vulnerability to shocks (e.g., sudden capital flow reversals, commodity price swings, policy uncertainty) and how targeted interventions—financial literacy, behavioural-aware regulation, countercyclical macroprudential tools, and market-structure reforms—can improve allocation efficiency and reduce tail risk. The contribution is threefold: (1) it articulates a multi-level model linking individual and collective behavioural responses to measurable resilience outcomes; (2) it surveys and synthesizes the recent empirical literature to isolate robust patterns and inconsistent findings across regions; and (3) it proposes a prioritised research and policy agenda that operationalizes behavioural insights into risk-optimization practices for regulators, financial institutions and development agencies. The paper concludes by outlining empirical strategies (quasi-experiments, panel econometrics, agent-based modelling) suitable for testing the framework, and by discussing limitations and ethical implications of behavioural interventions in financially fragile contexts. This integrative perspective aims to guide both scholars and practitioners seeking pragmatic, evidence-based approaches to strengthen financial resilience in emerging markets.