Cognitive Bias Asymmetry and Heuristic-Driven Market Anomalies: A Neurofinancial Noise Trading Analysis of Prospect Theory Elasticity in the Pakistan Stock Exchange (PSX)
Year: 2025
Type: article
Study design: Observational Study
Abstract: This study presents a novel empirical investigation into the impact of psychological biases on investment decision-making within the Pakistan Stock Exchange (PSX), integrating Kahneman and Tversky’s Prospect Theory and Heuristics Theory into a unified behavioral finance framework. Departing from conventional analyses, this research employs a dual-method approach, combining meta-theoretical synthesis with primary quantitative data, to dissect how cognitive distortions such as overconfidence, loss aversion, and representativeness skew financial choices under uncertainty. A technically advanced self-descriptive questionnaire was administered to 250 PSX traders, leveraging psychometric scaling to quantify bias intensity, followed by machine learning-assisted regression analysis to isolate dominant behavioral predictors. The findings reveal a nonlinear relationship between heuristic-driven biases and market anomalies, challenging traditional rational-agent assumptions. Notably, the study introduces a biassusceptibility index (BSI), a pioneering metric for assessing individual vulnerability to cognitive errors. By contextualizing these distortions within emerging markets, a previously underexplored domain, this work advances behavioral finance theory whileoffering pragmatic tools for investors, advisors, and regulators to mitigate irrational decision-making
Source: Social Sciences Spectrum
Authors: Abdul Malik, Wasim Abbas Shaheen, Waqas
Institution: Quaid-i-Azam University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: diamond
OpenAlex ID: W4409522964