Bias-Driven Investing in Emerging Capital Markets: a Blueprint Based on Familiarity, Anchoring, and Recency

Abstract

Behavioral finance serves as an essential method for illustrating how mindset and perception shape investment choices since conventional wisdom on capital market operations logically and insufficiently captures the reasons behind investors' sometimes irrational actions. This paper aims to explore investor behavior across two emerging stock markets, Romania and Turkey, affected by anchoring, familiarity, and recency biases over the last five years, framed by major shifts in the global environment. Average prices of benchmark stock market indices, intercorrelated with the COVID-19 crisis and the Russian-Ukrainian conflict, form the basis of the data in the study. The framework uncovers the effects of psychological variables on stock markets as coefficients and statistical significance tests. The findings reveal meaningful differences between the two capital markets: in post-pandemic Turkey, the negative familiarity index alerts investors' growing knowledge of the stock market, driven by an inflated sense of confidence about it. The anchoring effect in the Romanian post-COVID era has a notable positive impact on prices, implying a more pronounced attenuation in choice-making tied to previous experiences. In contrast, the presence of anchoring bias within the Turkish market has a substantial influence that leads to more rational investment decisions. Recency bias exerts a weaker influence in Romania than in Turkey. The paper highlights the behavioral variations between the markets studied and recommends more studies to clarify the emerging market's mechanisms. UDC: 330.322: 336.76; JEL: D91, F37, G41