Work

Looking for Someone to Blame: Delegation, Cognitive Dissonance, and the Disposition Effect

Year: 2015

Type: article

Abstract: ABSTRACT We analyze brokerage data and an experiment to test a cognitive dissonance based theory of trading: investors avoid realizing losses because they dislike admitting that past purchases were mistakes, but delegation reverses this effect by allowing the investor to blame the manager instead. Using individual trading data, we show that the disposition effect—the propensity to realize past gains more than past losses—applies only to nondelegated assets like individual stocks; delegated assets, like mutual funds, exhibit a robust reverse‐disposition effect. In an experiment, we show that increasing investors' cognitive dissonance results in both a larger disposition effect in stocks and a larger reverse‐disposition effect in funds. Additionally, increasing the salience of delegation increases the reverse‐disposition effect in funds. Cognitive dissonance provides a unified explanation for apparently contradictory investor behavior across asset classes and has implications for personal investment decisions, mutual fund management, and intermediation.

Source: The Journal of Finance

DOI: 10.1111/jofi.12311

Authors: TOM Y. CHANG, DAVID H. SOLOMON, MARK M. WESTERFIELD

Institutions: University of Southern California, University of Wisconsin–Madison, University of Washington

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W2555772173

FWCI: 39.9

Cites: 85

Cited by: 335

Related to: 10