Empirical Model of Desirability and Illusion-control Biases in Investment Decisions

Traditional finance often assumes that investors behave rationally when faced
with the task of decision making. Behavioural finance has challenged such
assumptions citing the role of behavioral biases. This study investigates the influence
of two critical behavioral biases—desirability bias and illusion of control—on
investment decisions in the Nigerian stock market. Traditional financial theories
assume investor rationality, yet empirical evidence from behavioral finance
demonstrates that psychological factors significantly shape investment behaviors.
Desirability bias, defined as the tendency to overestimate favorable outcomes, and
illusion of control, the overestimation of one’s ability to influence market events, are
both prevalent among retail investors but remain underexplored in tandem. Using a
logistic regression model and data from 110 respondents, the study empirically tested
the effects of these biases on investment decisions. Results reveal that while
desirability bias significantly influences investment behavior (p = 0.004), illusion of
control does not have a statistically significant effect (p = 0.434). These findings
suggest that emotionally driven optimism exerts a stronger influence on investor
decision-making than perceived control. The research contributes to the growing
literature on behavioral finance in emerging markets and underscores the importance
of investor education and bias-awareness interventions