The The Role of Cognitive Biases in the Fluctuation of Traditional and Modern Financial Markets

Abstract

Behavioural economics is overlooked when talking about economics but it is a key part of our everyday lives. Cognitive biases are the foundation of behavioural economics and they dictate every decision we make. In this paper, I examine the role our inherent cognitive biases play in the fluctuation of traditional and cryptocurrency markets. I first lay the groundwork by establishing what behavioural economics is and explaining common biases as well as explaining what financial markets are in general. I then use the dot-com bubble as a case study to analyse the existence of these biases in a traditional market by comparing fluctuations during the dot-com bubble to the speculative bubble model. Following this, I introduce cryptocurrencies and analyse the cryptocurrency market over a time period and analyse trends to determine whether a bias exists. This is done using internet search data from Google Trends, as well as conducting a self-designed survey and a regression analysis of the resulting data. Results corroborate well with the existing literature and tentatively point to the existence of cognitive biases with regard to market fluctuations in both traditional and crypto assets. The alignment of my survey data with my research strengthens the premise that these biases not only exist but also contribute to the fluctuations of markets.