IDEAS home Printed from https://ideas.repec.org/a/eee/pacfin/v96y2026ics0927538x25003373.html

Irrational cognition in the stock market

Author

Listed:
  • Xie, Jun
  • Shi, Shuoyue
  • Gao, Bin

Abstract

This study establishes irrational cognition (IC)—a novel composite index capturing representativeness, anchoring, availability, and framing biases by employing a bottom-up approach—as a robust predictor of cross-sectional stock returns in China. The findings demonstrate that higher IC stocks exhibit statistically significantly lower future returns, with this predictive power persisting over intermediate horizons and surviving rigorous controls for established firm characteristics and asset pricing factors. Decomposition analyses reveal that IC's predictive power stems primarily from historical persistence information (entrenched mispricing from cognitive bias recurrence) and unique information (cognitive distortion immediately triggered in noisy information environments). The IC index advances behavioral finance by providing an extensible, theory-grounded tool to quantify aggregate cognitive distortions as systematic drivers of exploitable anomalies orthogonal to classical risk factors.

Suggested Citation

  • Xie, Jun & Shi, Shuoyue & Gao, Bin, 2026. "Irrational cognition in the stock market," Pacific-Basin Finance Journal, Elsevier, vol. 96(C).
    • Handle: RePEc:eee:pacfin:v:96:y:2026:i:c:s0927538x25003373
    DOI: 10.1016/j.pacfin.2025.103000
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0927538X25003373
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.pacfin.2025.103000?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    More about this item

    Keywords

    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:pacfin:v:96:y:2026:i:c:s0927538x25003373. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/pacfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.