Beyond market anomalies: How heuristics and perceived efficiency shape investor behavior in developing markets

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Cognitive biases often influence investor behavior in developing capital markets, leading to market anomalies and affecting overall market efficiency. With the increasing integration of global financial markets and the growing participation of retail investors, understanding these biases is more critical than ever. While market anomalies have been extensively studied in developed markets, their influence in developing economies remains under-explored. This study aims to examine the impact of heuristic biases on investment decisions, focusing on Nepal’s stock market. Structural Equation Modeling is used to assess how perceived market efficiency mediates the relationship between heuristic biases and investor behavior. Data were collected from purposively selected 403 active individual investors in Nepal Stock Exchange (NEPSE). The findings reveal that representative and overconfidence biases significantly and positively influence investment decisions and market efficiency. Specifically, investors exhibiting these biases are more likely to make confident and bold investment choices, believing in their ability to predict market movements accurately. Furthermore, the study finds that perceived market efficiency mediates the relationship between anchoring and adjustment bias and investment decisions, suggesting that investors who rely heavily on initial information (anchors) adjust their decisions based on their perceptions of market efficiency. The results highlight the critical role of heuristic biases in shaping investor behavior and stress the importance of market efficiency in this process. The study emphasizes the need to enhance investor awareness of these biases and implement policies to improve market transparency and efficiency. Such measures are vital for mitigating risks and fostering a more robust and resilient financial market in developing economies like Nepal.

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    • Figure 1. Conceptual framework
    • Figure 2. Structural model of heuristics and investment decision
    • Figure 3. Structural model of determinants of heuristics and market efficiency
    • Table 1. Operationalization of the variables
    • Table 2. Initial and improved measurement model indices
    • Table 3. Construct validity and reliability
    • Table 4. Structural path coefficient of determinants of heuristics on investment decision
    • Table 5. Structural path coefficient of determinants of heuristics on market efficiency
    • Table 6. Mediation analysis results
    • Conceptualization
      Durga Datt Pathak, Bharat Singh Thapa
    • Data curation
      Durga Datt Pathak
    • Formal Analysis
      Durga Datt Pathak
    • Investigation
      Durga Datt Pathak
    • Methodology
      Durga Datt Pathak
    • Software
      Durga Datt Pathak
    • Validation
      Durga Datt Pathak
    • Visualization
      Durga Datt Pathak, Bharat Singh Thapa
    • Writing – original draft
      Durga Datt Pathak
    • Project administration
      Bharat Singh Thapa
    • Supervision
      Bharat Singh Thapa
    • Writing – review & editing
      Bharat Singh Thapa