Hegemony of behavioral biases dislodging financial well-being: evidence from India, USA and UK

Abstract This paper gathers evidence related to behavioral anomalies like the herding bias, the disposition effect, overconfidence bias, and noise trading in the stock markets of western and eastern economies, with a focus on India, the USA, and the UK. It describes the market situation in which behavioral biases have taken hold and the extent to which investors are susceptible to their influence, deteriorating their financial well-being. We used cross-sectional absolute deviation (CSAD), vector auto regression (VAR) and Granger causality on 3,960 observations of constituent companies from three major stock indices of the sample countries for tenure of 22-years (January 1, 2000, to December 31, 2021). It was found that Indian and USA stock markets do not validate the existence of herding for the overall study period, contrary to the evidence of herd mentality found in the UK stock exchange. Nevertheless, the findings indicate the existence of herding in extreme market conditions and during crisis periods in all three countries. Moreover, the findings confirm the presence of anomalies in both the Indian and US stock markets, such as overconfidence, disposition effects, and noise trading. Contrary to expectations, there is insufficient evidence to support the presence of overconfidence bias in the UK stock market. However, the disposition effect and noise trading have been observed among FTSE100 companies. This study highlights the contradictions and similarities among diverse global investors. It provides practical confirmation for the behavioral irrationalities at the market level, which is more commonly conceptualized than the prevailing propositions at the individual investor level. These findings are useful for fund managers, investors, and market regulators.