Asymmetric Motivated Reasoning in Investor Judgment

49 Pages Posted: 12 Apr 2017 Last revised: 3 Mar 2023

See all articles by W. Brooke Elliott

W. Brooke Elliott

University of Illinois at Urbana-Champaign

Jessen L. Hobson

University of Illinois at Urbana-Champaign

Ben W. Van Landuyt

University of Arizona

Brian J. White

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: February 10, 2023

Abstract

We develop and test a refinement to motivated reasoning theory that predicts long investors are more prone than short investors to forming biased beliefs about the value of a stock. Our theory suggests that motivated reasoning is muted for short investors because the investing setting conveys a conventional preference for prices to go up that is directionally inconsistent with short investors’ incentivized preference for prices to go down. We examine this overarching premise across four experiments. Experiment 1 tests our theory in an investing setting in which participants take either long or short positions. Compared to a rational benchmark for an unbiased judgment, we find that long traders’ estimates of future stock price exhibit upward bias while short traders’ estimates are unbiased. Consistent with motivated reasoning as the process underlying these results, the magnitude of long traders’ bias becomes less pronounced as the amount of uncertainty in the information environment decreases. Experiment 2 suggests that direct experience with taking short positions can increase short traders’ propensity to engage in motivated reasoning. Experiments 3 and 4 provide additional evidence for our theory outside of the investing context. Overall, our paper contributes new insights into differences between long and short investors and speaks to the broader literature on bias in judgment and decision-making that spans multiple fields.

Keywords: motivated reasoning, incentives, investors, short selling, uncertainty

Suggested Citation

Elliott, W. Brooke and Hobson, Jessen L. and Van Landuyt, Ben W. and White, Brian J., Asymmetric Motivated Reasoning in Investor Judgment (February 10, 2023). Available at SSRN: https://ssrn.com/abstract=2950329 or http://dx.doi.org/10.2139/ssrn.2950329

W. Brooke Elliott

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Jessen L. Hobson

University of Illinois at Urbana-Champaign ( email )

4011 Business Instructional Facility
515 East Gregory Drive
Champaign, IL 61820
United States

Ben W. Van Landuyt

University of Arizona ( email )

Tucson, AZ 85721
United States

Brian J. White (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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