Abstract

http://ssrn.com/abstract=2255674
 
 

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


Tom Chang


University of Southern California - Marshall School of Business - Finance and Business Economics Department

David H. Solomon


University of Southern California - Marshall School of Business

Mark M. Westerfield


University of Washington

October 1, 2014


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 non-delegated assets like individual stocks; delegated assets, like mutual funds, exhibit a robust reverse-disposition effect. In an experiment, we show increasing investors' cognitive dissonance results in both a larger disposition effect in stocks and also 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.

Number of Pages in PDF File: 72

Keywords: Disposition Effect, Cognitive Dissonance, Mutual Funds, Delegation

JEL Classification: G11, G12, D14

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Date posted: April 24, 2013 ; Last revised: October 9, 2014

Suggested Citation

Chang, Tom and Solomon, David H. and Westerfield, Mark M., Looking for Someone to Blame: Delegation, Cognitive Dissonance, and the Disposition Effect (October 1, 2014). Available at SSRN: http://ssrn.com/abstract=2255674 or http://dx.doi.org/10.2139/ssrn.2255674

Contact Information

Tom Chang
University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )
Marshall School of Business
Los Angeles, CA 90089
United States
David H. Solomon
University of Southern California - Marshall School of Business ( email )
Los Angeles, CA 90089
United States
Mark M. Westerfield (Contact Author)
University of Washington ( email )
Box 353200
Seattle, WA 98195
United States
HOME PAGE: http://www.markwesterfield.com
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