A comprehensive review of heuristic biases and their influence on investor behaviour in stock market decisions

Abstract

Investor behaviour in the stock market is often shaped not just by logical evaluation but also by deep-seated psychological patterns known as heuristic biases. This review paper analyses how these biases— overconfidence, representativeness, anchoring, availability, and the gambler’s fallacy — influence individual and institutional investment decisions. Drawing from recent empirical studies and behavioural finance literature, the paper explains how investors rely on mental shortcuts that simplify decision-making but often result in systematic errors such as mispricing, herding, and excessive volatility. The study also explores how these biases interact and amplify each other, producing compounding effects that influence both personal and market-level outcomes. Differences between developed and emerging markets are highlighted, showing that biases are more prominent where financial literacy is lower and information asymmetry is higher. The paper concludes by suggesting educational, technological, and policy-driven methods to help investors make more rational, evidence-based decisions, while offering directions for future behavioural finance research.