Probing the Impact of Heuristic-driven Biases on Stock Market Anomalies during the COVID-19 Pandemic: Evidence from an Emerging Asian Economy

Purpose – This study investigates the effect of heuristic-driven biases on fundamental, technical, and calendar anomalies in the stock market during the coronavirus disease 2019 (COVID-19) pandemic in the Pakistani emerging economy.   Design/methodology/approach – The deductive approach was used as the research is based on the theoretical framework of behavioral finance. Data were collected from 307 individual investors actively trading on the Pakistan Stock Exchange (PSX) using a questionnaire and a cross-sectional design. The hypotheses were tested using structural equation modeling (SEM). Findings – The results indicate that heuristic-driven biases have a markedly positive influence on the fundamental, technical, and calendar anomalies during the COVID-19 pandemic in an emerging economy. This means that heuristic-driven biases significantly contribute to the occurrence of fundamental, technical, and calendar anomalies in the stock market during the COVID-19 pandemic in an emerging economy. These findings suggest that individual investors influenced by heuristics are prone to make biased decisions, leading to stock mispricing and market inefficiencies. Practical implications – This study encourages investors to avoid relying on heuristic-driven biases and emotional decision-making when trading in the stock market. It provides valuable awareness and understanding of these biases and their impact on stock market anomalies, particularly during times of crisis such as the COVID-19 pandemic. The insights offered by this study hold significant value for policymakers, market regulators, and professionals in financial institutions, including portfolio managers, investment banks, traders in commercial banks, and mutual funds. By recognizing and understanding heuristic-driven biases, investors can make informed decisions, select better investment tools and avoid repeating expensive errors, which occur due to heuristic biases. This, in turn, reduces stock market anomalies and promotes market efficiency. This study highlights the necessity of adopting specific investment strategies to control and mitigate "mental mistakes" caused by heuristic biases. Investors can improve their decision-making processes by focusing on these strategies, ultimately creating a more efficient and effective market environment. Originality/value – The current study is the first to focus on links between heuristic-driven biases and stock market anomalies during the COVID-19 pandemic in an emerging economy. It adds to the literature in behavioral finance, specifically the role of heuristics in stock market anomalies; this field is in its initial stage, even in developed countries, while in emerging countries, little work has been done.