Cognitive biases in investors' behaviour under stress: Evidence from the London Stock Exchange

The paper examines the implications arising from the effect of two cognitive biases, representativeness and conservatism, for securities price behaviour on the London Stock Exchange. In a single- and multi-factor framework of abnormal returns, the aspects of trend and consistency in the performance ratios of UK companies are examined on the base of behavioural finance theories with respect to cognitive biases. The findings obtained by the multi-factor model confirm the existence of two cognitive biases and trends that investors observe in financial performance over the long-term horizon, which is not the case for the single-factor model.