Cognitive biases and historical turns. An empirical assessment of the intersections between minds and events in the investors’ decisions

Mainstream theory of finance is based on the assumptions that markets are efficient and economic agents are rational, in the sense that they use optimally the information they have in order to maximize their utility. At least since the “Allais paradox”, countless experiments have shown that this is not the case and investors’ decisions are often inconsistent. In particular, the researches by Kahneman and Tversky have highlighted that investor behaviors are not rational and sometimes are inconsistent with the logic of the traditional finance theory, due to numerous cognitive biases, which interfere with the choice process of investors. In this paper we investigate some of the most well-known cognitive biases: framing effect, loss aversion, endowment effect, decoy effect and disposition effect. In addition, the availability and representativeness heuristics and their associated biases (confirmation bias, accessibility bias, and conjunction fallacy) are examined. Our experimental methodology is based on a questionnaire consisting of 23 questions and organized into 6 sections, each referring to the various biases examined. The answers obtained differ somewhat from the huge literature on cognitive biases. We understand these differences as mainly connected to the unheard situation created by the Covid-19 pandemic, showing that personal experiences do have an effect on risk preferences.