The Effect of Cognitive and Emotional Biases on Stock Market Investor Decision-Making
: An Empirical Study

  • Ghaydaa Gamaleldin

Student thesis: Doctoral Thesis


Insights from psychology and other social sciences revealed that it has become imperative to supplement the original standard finance theories with psychological assertions to better understand how behavioural dispositions tend to shape decision-making processes of the main participants of financial markets. Thus, the aim of this study is to scrutinise the effect of cognitive and emotional biases on individual stock market investor decision-making. This aim was achieved by identifying biases that influence investors’ decisions, exploring the mediating mechanisms stimulated by such biases, and understanding how they may have varying effects on decisions of investors from countries with different levels of economic development.

Aiming for greater generalizability, positivistic quantitative methods were adopted. However, quantitative methods were preceded by qualitative methods via six interviews with investors from two countries (Egypt and the USA) to compile a comprehensive list of common biases. Using a deductive approach, biases were classified into seven main bias groups with similar underlying characteristics: attention bias, extrapolation bias, representativeness heuristics, mental accounting, herding, blind spot bias, and emotional biases. Three proxies for decision-making quality focusing on processes rather than outcomes were employed: decision-making competence, reflectiveness, and self-reported vigilance. Due to its role in informing social conduct, survey research was adopted through a questionnaire assembled using items previously utilized and validated in the literature. To further test its viability and validity, the questionnaire was personally administered to a pilot group consisting of ten stock market investors in Egypt. Primary data was collected from stock market investors in 23 countries in eight regions within four economic development categories to incorporate the maximum level of diversity. Out of 816 completed responses, 590 were accepted and used after applying two methods to filter out responses whose quality was suspected. Descriptive analysis, multiple regression, ordinal logistic regression, binary logistic regression, and path analysis were then utilized.

The research findings provide a holistic representation of how cognitive and emotional biases have varying effects on each aspect of investment decision-making. The results also show inconsistency between investors’ actual competence levels and how well they think they do. Furthermore, it was established that cognitive biases are not at play in isolation; but are rather in strong interplay with emotional biases and with each other, reflecting the complexity of their effects on decisions. Additionally, varying effects were revealed in different economic settings, emphasizing the role played by economic conditions in how investment decisions are made. This study is expected to advance knowledge on behavioural elements and their bearing on investment decisions and significantly benefit practice by providing guidance towards better systematic investment decisions.
Date of Award3 Oct 2022
Original languageEnglish
SupervisorMessaoud Mehafdi (Main Supervisor) & Aaron Tan (Co-Supervisor)

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