The psychology of the market: Are cognitive illusions driving risk-related investor behaviour?

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Abstract

This study investigates how cognitive illusions, rooted in heuristics and prospect theory, influence individual investment decisions in the Egyptian Stock Exchange (EGX). The research gap stems from the limited understanding of how behavioural biases affect decision-making in emerging markets, where financial literacy and market efficiency remain underdeveloped. The study aims to provide empirical evidence on the extent to which specific biases shape investor behaviour, thereby bridging the gap between behavioural finance theory and practice. Data were collected through a structured survey of 300 active investors, and the analysis employed reliability and validity testing, normality checks, correlation analysis, and ordinary least squares (OLS) regression modelling to test the proposed hypotheses. The findings reveal that availability, overconfidence, and the gambler’s fallacy significantly affect investment decisions, whereas representativeness and anchoring biases do not. Similarly, loss aversion and regret aversion play a decisive role in shaping investor behaviour, whereas mental accounting and self-control biases have limited applicability. These findings are partially consistent with existing arguments within the behavioural finance literature (Youssef et al., 2021; Mansour et al., 2023; Gamal & Wahba, 2025) and their extension to the Egyptian environment. The paper closes with real-world implications for investors and policymakers, respectively, underlining its usefulness for enhancing financial decision-making and regulatory policies in emerging economies.

Keywords: Cognitive Illusions, Heuristics, Prospects, Individual Investment Decision, Risk Egypt, EGX

Authors’ individual contribution: Conceptualisation — H.W., A.A., and R.P.; Methodology — H.W., A.A., and R.P.; Validation — H.W., A.A., and R.P.; Formal Analysis — H.W., A.A., and R.P.; Investigation — H.W., A.A., and R.P.; Writing — Original Draft — H.W., A.A., and R.P.; Writing — Review & Editing — H.W., A.A., and R.P.; Visualisation — H.W., A.A., and R.P.; Supervision — H.W. and R.P.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: D14, D91, G11, G41

Received: 15.06.2025
Revised: 25.08.2025; 04.11.2025
Accepted: 11.11.2025
Published online: 13.11.2025

How to cite this paper: Wahba, H., AbdulHamid, A., & Pasha, R. (2025). The psychology of the market: Are cognitive illusions driving risk-related investor behaviour? Risk Governance and Control: Financial Markets & Institutions, 15(4), 97–108. https://doi.org/10.22495/rgcv15i4p9