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

72 Pages Posted: 24 Apr 2013 Last revised: 31 Jan 2015

Tom Chang

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

David H. Solomon

Boston College - Carroll School of Management

Mark M. Westerfield

University of Washington

Multiple version iconThere are 2 versions of this paper

Date Written: 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.

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

JEL Classification: G11, G12, D14

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: https://ssrn.com/abstract=2255674 or http://dx.doi.org/10.2139/ssrn.2255674

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

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
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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