This study examines, via the prism of behavioral finance, how investor psychology affects market movements. Although empirical evidence increasingly emphasizes the impact of cognitive biases and emotional aspects on financial decision-making, traditional financial theories, such as the Efficient Market Hypothesis, presume rational investor behavior. With the use of ideas from psychology, cognitive science, and sociology, behavioral finance explains how market oddities like bubbles, crashes, and mispricing are caused by heuristics, prospect theory, overconfidence, herding, and other biases. In addition to discussing important cognitive biases like overconfidence, loss aversion, swarming behavior, confirmation bias, and home bias, the paper first looks at the theoretical underpinnings of behavioral finance, specifically prospect theory. It demonstrates how these biases cause systematic departures in market behavior by upsetting logical investing patterns. The study assesses academic studies on market dynamics and investor psychology using a qualitative literature screening method. Results indicate that psychological biases increase systemic risk by influencing individual decision-making as well as by collectively producing extensive market phenomena. Investors, legislators, and financial institutions seeking to enhance decision-making procedures and market stability must be aware of these trends. Understanding behavioral finance is crucial for developing robust investment strategies and avoiding the traps of excessive exuberance and panic as financial markets become more complicated.