## 2 Cognitive Biases in the Stock Market: Literature Review
The history of this behaviour goes back to 1796 according to a published paper by [PERSON] [28]. It was first identified in the laboratory and under controlled circumstances in the literature on probability matching. It was observed in real life in a Las Vegas casino in 1913; for this reason, it is known as the Monte Carlo fallacy. The gambler's fallacy is caused by the representativeness heuristic ([PERSON] and [PERSON] [29]). Examples of this fallacy include the instance where a group of experienced investors were asked a couple of questions [30] in order to identify their thinking methodology and, consequently, their decision-making approaches; there are also documents revealing that market \"signals\" considered by practical analysts are compatible with a number of cognitive fallacies, including gambler's fallacy. In general, the gambler's fallacy is considered to be a well-known phenomenon, both in the laboratory and in the real world, including stock market decisions and behaviour. This cognitive bias was addressed in Q9 of the survey: \"The price of the company which you invested in has decreased in the last six months, thus you expect it to increase in the next six months\". **Hot hand fallacy** is the opposite of gambler's fallacy; it is the belief in excessive persistence rather than reversals [31]. It assumes that a long series of the same results will last longer still. It relies on the intuition accumulated from past events and the transposition of their results into future outcomes. With hot hand fallacy, though, one may think that a winning streak will continue in the future so that it can be interpreted as a false uninterrupted success sequence. [PERSON] and [PERSON] [32] have built a theoretical model for the analysis of both hot hand and gambler's fallacies and have proven that both cognitive biases may strongly impact the behaviour of financial markets. It was also shown by way of experiment that it is gender-dependent and that female-only groups are more prone to this bias than male-only groups [33]. This cognitive bias was addressed in Q11 of the survey: \"As the returns of the company you invested in have risen over the last six months, you would expect them to continue to rise over the next six months\". **Bandwagon effect (or groupthink)** is part of a larger group of cognitive biases or errors in thinking that influence people's judgments and decisions [34]. Cognitive biases are often designed to help people think and reason more quickly, but they often introduce miscalculations and mistakes. \"If potential investors pay attention not only to their own information about a new issue, but also to whether other investors are purchasing, bandwagon effects, or informational cascades, may develop\" [35]. This phenomenon is similar to the herd behaviour of agents and can be observed in the stock market decision-making process when investors try to include themselves in a large cluster of investors, so they feel relatively safe and secure regarding their investment (since everyone else is walking the same path). In reference to financial markets, the bandwagon effect can be observed when an investor who discovers that the total trading proportion for the company they invested in was more than expected would consider increasing the sum of their stock market share. This cognitive bias was addressed in Q12 of the survey: \"Over the past two months, the total trading proportion for the company you invested in was more than expected, so you consider increasing the sum of your stock market holdings\". **The Dunning-Kruger effect** is observed when people tend to overestimate their own competency, which leads to overconfidence and underestimation of the limits of their own understanding [36]. This fallacy is especially dangerous in situations where agents assume that they have sufficient knowledge for predicting and managing their stock portfolios. It can also be more time-consuming for investors to behave in this way.