How do cognitive biases affect individual investors’ decision-making? A Dhaka Stock Exchange case

Type of the article: Research Article AbstractIn an attempt to examine the relevance of behavioral finance in the capital market of Bangladesh, this study intends to investigate which cognitive biases and behavioral errors lead to the psychological biases ultimately affecting the rationality of individual investors’ choice of investment pattern on the Dhaka Stock Exchange. A structured survey questionnaire is used, identifying 32 factors grouped into seven separate quantitative variables – accounting, technical, diversification, herding, heuristics, market, and personality – to evaluate against one dependent variable: the demand for common stock. The database has been developed for a one-year tenure from January 2024 to January 2025. The paper applies multiple Regression Analysis and Chi-Square tests on 424 active investor responses after confirming the reliability and validity of the variables. The findings reveal that, except for diversification, five independent variables – market, accounting, technical, herding, and heuristics – appear significant at the 1% significance level, while personality significantly affects the rationality of investment behavior at the 5% significance level. This confirms the existence of psychological and cognitive biases that disrupt the individual investment patterns of investors at the Dhaka Stock Exchange. Consequently, this study recommends that more awareness and financial literacy should be introduced by formal training and counselling sessions in exchange for the better restoration of confidence and literacy of investors in their respective belongingness to the financial market.