Cognitive Heuristics and Risk Perception as Determinants of Investment Strategies Among Selected Bank Customers in Nigeria: Evidence from Ondo State

Abstract

The proposition by traditional finance theory maintains that investors make rational decisions based on the single motive of maximizing shareholders’ wealth through the relationship between risk and return. However, growing empirical evidence indicates that psychological biases and cognitive processes influence investment decisions in ways that differ from classical predictions. Against this background, the study examined how behavioural finance factors, particularly cognitive heuristic bias and perceived risk–outcome distortion, influence the investment decision-making strategies of customers of selected investment banks in Akoko South-West, Ondo State, Nigeria. A survey research design was adopted, and data were collected from a clearly defined sample of 120 active customers of the selected investment banks. The data were analyzed using Chi-square and ordinary least squares regression techniques. The findings revealed that cognitive heuristic bias explained approximately 29% of the variation in customers’ investment decision quality (β = 0.54, p < 0.01), while perceived risk–outcome distortion explained approximately 34% of the variation in investment decisions (β = 0.59, p < 0.01). Contrary to the assumptions of classical finance theory, greater reliance on heuristics and heightened sensitivity to risk had positive and statistically significant effects on the investment decisions of the respondents. The study concluded that behavioural shortcuts may function as adaptive decision-making mechanisms in situations where financial information is scarce and market conditions are uncertain. Practically, the findings suggest that investment banks should incorporate investors’ behavioural tendencies into product design, customer advisory services, risk communication, and financial education programmes. The study therefore recommends that, behaviourally informed financial literacy policies supported by appropriate regulatory frameworks to improve investor decision-making and welfare.