Which behavior can result from illusion of control bias?

The illusion of control bias occurs when investors overestimate their ability to influence or control the outcomes of events, particularly in situations where outcomes are predominantly determined by chance. This cognitive bias often leads investors to engage in behaviors that they believe will ensure favorable results, even when those outcomes are largely unpredictable.

Overtrading of assets is a common consequence of this bias. When investors believe they have superior skill or insight, they may trade more frequently, expecting to capitalize on their perceived ability to control the market. This can result in excessive buying and selling of assets, driven by an overconfidence in their decision-making abilities and a failure to recognize the inherent risks associated with fluctuating market conditions.

In contrast, behaviors such as increased diversification or cautious decision making are typically not associated with the illusion of control bias. Diversification is generally a prudent strategy aimed at risk management, while cautious decision making is usually rooted in a recognition of the uncertain nature of investments. Enhanced predictability in market outcomes would imply a belief in the ability to forecast results accurately, which contradicts the variability inherent in financial markets influenced by numerous unpredictable factors.