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Abstract
This study explores how behavioral biases affect individual investors' investment decisions in
the stock market in Nepal, particularly the overconfidence, representativeness, availability,
anchoring and herding biases. The research stems from theories in behavioral finance like
Prospect Theory and Heuristics and Biases program, which has identified a lack of knowledge
about investor psychology in the developing stock market of Nepal, NEPSE, where
conventional rational assumptions are not always applicable. The type of research design used
was descriptive and causal-comparative research design. A total of 385 individual investors
from the convenience sample of Rupandehi of Nepal were contacted to collect the primary data
of this study through a structured questionnaire. Cronbach's alpha (> 0.68 for all constructs)
was used to measure reliability. Descriptive statistics, Pearson correlation and multiple
regression was used in SPSS for data analysis. The findings show statistically significant
positive correlations between all the behavioural biases and investment decisions (r = 0.61 –
0.69; p< 0.01). The five biases accounted for 62% of the variation in investment decisions (R
= 0.79, R 2 = 0.62, F = 94.37, p < 0.001) in multiple regression analysis. The most important
predictor was availability bias (β = 0.301); the others were the anchoring effect (β = 0.254),
overconfidence (β = 0.241), representativeness (β = 0.226), and herding (β = 0.219). All
hypotheses were accepted. The results support the notion that there are psychological and
cognitive biases that are a major factor affecting the investment decisions of the Nepalese
investors apart from rational analysis. The study makes several important contributions to the
behavioral finance literature in developing markets and it has implications for investor
education, for financial market regulation by SEBON and NEPSE, for brokerage services and
for improving financial market development by strengthening financial literacy and
information transparency.
Keywords: Behavioural finance, overconfidence, representativeness, availability bias,
anchoring, herding, investment decision.
