AN EMPIRICAL STUDY OF THE EFFECTS OF COGNITIVE BIASES ON STOCK MARKET RETURNS IN NORTH-EASTERN NIGERIA

Abstract

Investment return volatility remains a major challenge confronting investors in the Nigerian financial market, significantly influencing investor behavior within the stock market. This study aims to investigate the effects of cognitive biases on stock market returns in north-eastern Nigeria. Employing a cross-sectional survey design, data were collected from individual investors in north eastern part of the country actively participating in the Nigerian financial market. The study population comprises all investors in the north east trading in the market, from which a sample of 92 respondents was purposively drawn. Descriptive and inferential statistical methods, including simple and multiple regression analyses, were used to test the stated hypotheses. Findings indicate that representativeness bias has a significant impact on stock market returns, demonstrated by a strong positive correlation (R = 0.781) and a high coefficient of determination (R² = 0.771), indicating that 77.1% of the variation in stock returns is explained by this bias. The result is statistically significant (p = 0.001), leading to the rejection of the null hypothesis (H0₁). Similarly, regret aversion bias also shows a significant influence on stock returns, with a moderate positive correlation (R = 0.651) and an R² value of 0.648, signifying that 64.8% of the variation is attributable to this bias. Its statistical significance (p = 0.010) supports the rejection of the second null hypothesis (H0₂). The study concludes that both representativeness and regret aversion biases have a significant impact on stock market returns in Nigeria. It recommends that investors receive targeted education and training in behavioral finance to better identify and manage these cognitive biases, thereby promoting more rational investment decisions. Furthermore, policymakers are encouraged to introduce measures that enhance market transparency and reduce information asymmetry to support informed investor behavior.