Providing a mathematical framework to deduce the dynamics of the pricing behavior of investors through heterogeneous bias.

Since investors’ behavioral bias is a relatively vague concept, its accurate definition and measurement are extremely challenging. Furthermore, the common asset pricing models do not take into account the effect of behavioral biases in portfolio assessment. However, the dawn of behavioral finance undermined all the foundations of rational finance yet it did not result in an independent paradigm for explaining the inefficiencies. This concept also led to this major question among the investment advisers: How the advice about buying, maintaining or selling an investment shall be offered based on theories or the immeasurable behavioral biases? Attempts to quantify the biases and use them in the mathematical models became the subject of behavioral finance. Noise is one of the difficulties in finding the dynamism factors of financial market behavior. The chance events that occur round the globe are constantly changing the values but extraction of these chance events from the possible definite forces is difficult. Therefore, this study is an attempt to propose a mathematical model for measuring biases and its application to behavioral optimization in portfolio selection.