Looking for Someone to Blame: Delegation, Cognitive Dissonance, and the Disposition Effect
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
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
Date posted: April 24, 2013 ; Last revised: January 31, 2015
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