Impact of adaptability factors on irrational investment decisions mediated by behavioural biases

Despite growing evidence that behavioural biases distort investment decisions, little is known about how investors’ cognitive and social adaptability characteristics shape these biases, particularly in frontier markets. Existing studies largely examine behavioural biases and investor characteristics independently, offering limited insight into the mechanisms underlying irrational investment decisions. This study examines how adaptability factors influence irrational investment decisions in Bangladesh, a representative frontier market, through the mediating effects of herding and overconfidence biases. Grounded in bounded rationality and prospect theory, and using the Adaptive Market Hypothesis as a conceptual lens to explain investor behaviour, it distinguishes between internal (cognitive) and external (social) adaptability factors to capture behavioural variations within a frontier market context. Data were collected from 640 retail investors of the Dhaka Stock Exchange using purposive sampling and a structured questionnaire and analysed through Partial Least Squares Structural Equation Modelling. The study addresses a gap in the literature concerning micro-level behavioural mechanisms through which individual investors’ cognitive and social adaptability shape behavioural biases in frontier markets. The findings demonstrate two behavioural pathways of bias transmission, showing that internal factors significantly increase overconfidence, while external factors primarily drive herding, both contributing to irrational investment decisions. Financial literacy, however, mitigates these biases, reducing irrationality. The study extends behavioural finance by integrating adaptability dimensions within a frontier market context. It offers actionable insights for policymakers to enhance financial literacy, strengthen institutional trust, and foster resilient investment ecosystems aligned with the Sustainable Development Goals on economic growth and strong institutions. Originality lies in introducing a market adaptability model that links adaptability factors, behavioural biases, and rationality, with AMH serving as a conceptual interpretive lens.