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Market Volatility vs. Economic Growth: The Role of Cognitive Bias

This study aims to investigate the interaction between market volatility, economic growth, and cognitive biases over the period from April 2006 to March 2024. Market volatility and economic growth are critical indicators that influence economic stability and investment behavior. Financial market volatility, defined by abrupt and erratic changes in asset values, can have a big impact on the expansion and stability of the economy. According to conventional economic theory, there should be an inverse relationship between market volatility and economic growth since high volatility can discourage investment and erode trust. Market participants’ cognitive biases are a major aspect that complicates this connection. Due to our innate susceptibility to cognitive biases, including herd mentality, overconfidence, and loss aversion, humans can make poor decisions and increase market volatility. These prejudices frequently cause investors to behave erratically and irrationally, departing from reasonable expectations and causing inefficiencies in the market. […]