Investor Emotions and Cognitive Biases in a Bearish Market Simulation: A Qualitative Study

Abstract

Our paper investigates how emotions and cognitive biases shape small investors’ decisions in a bearish market or are perceived as such. Using semi-structured interviews and a focus group, we analyze the behavior of eight management science students engaged in a three-day trading simulation with virtual portfolios. Our findings show that emotions are active forces influencing judgment. Fear, often escalating into anxiety, was pervasive in response to losses and uncertainty, while frustration and powerlessness frequently led to decision paralysis. Early successes sometimes generated happiness and pride but also resulted in overconfidence and excessive risk-taking. These emotional dynamics contributed to the emergence of cognitive biases such as loss aversion, anchoring, confirmation bias, overconfidence, familiarity bias and herd behavior. Emotions often acted as precursors to biases, which then translated into specific decisions—such as holding losing positions, impulsive “revenge” trades or persisting with unsuitable financial strategies. In some cases, strong emotions bypassed cognitive biases and directly drove behavior. Social comparison through portfolio rankings also moderated responses, offering both comfort and additional pressure. By applying a qualitative perspective—not commonly used in behavioral finance—our study highlights the dynamic chain of emotions → biases → decisions and the role of social context. While limited by sample size and the short simulation period, this research provides empirical insights into how psychological mechanisms shape investment behavior under stress, offering avenues for future quantitative studies.