Cognitive Bias in News: Implications for Sentiment, Emotion, and Systemic Risk

Cognitive biases influence investor decision-making and how media outlets frame and report news. This study investigates whether cognitive biases embedded in news data can serve as early warning indicators of shifts in market sentiment and systemic risk, and whether emotion adds analytical value. News data from three South African outlets were analyzed for the period from January 2025 to May 2026, alongside major events that materially affected systemic risk. The study establishes the relationship between cognitive biases and the economic cycle, defines key cognitive bias proxy measures covering herding, availability, overconfidence, and loss aversion, and connects these measures to sentiment, emotion, and systemic risk. Large language models are used to extract sentiment and emotion from the news data. A systemic risk index is derived from South African equity, bond, foreign exchange, and credit variables. It captures financial stress and is more responsive to shocks than macroeconomic-based indices. The study shows that cognitive bias variables help explain changes in sentiment and emotional intensity, which often precede structural breaks in market variables. Spillover risk analysis shows that exogenous shocks coincide with more negatively toned news articles and a sharp increase in systemic risk.