Farhana Yasmin

The aim of this paper is to identify the behavioral and psychologic biases that may affect the investment decisions of individual investors in Bangladesh. This study considered behavioral anomalies such as Cognitive Dissonance, Regret Aversion, Loss Aversion, Overconfidence, Hindsight, Illusion of Control, Herd instinct, Self-attribution and Representativeness, and analyzed how significantly each of these would prevail by preventing investors from making rational decisions when investing. The research has been developed through a structured questionnaire and analyzing the survey results collected from 196 individual investors involved in Dhaka Stock Exchange. Factor analysis on a behavioral approach was conducted to analyze the responses. The outcome reveals that investors are not rational, and that there is a significant impact of the different behavioral biases, particularly cognitive dissonance (0.8005), regret aversion (0.7793), loss aversion (0.7418) and illusion of control biases (0.7260) on the investment decisions of investors in Bangladesh. Moreover, the most influential of four factors extracted jointly can explain 55.63% of the variance of the variables. Finally, the factor loading values show that all nine hypotheses can be rejected, which makes it clear that all the designated psychological biases exist in the investment decision of DSE investors.

Type of the article: Research Article

Abstract
In 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.