Asymmetric Motivated Reasoning Among Long and Short Investors
43 Pages Posted: 12 Apr 2017 Last revised: 20 Nov 2018
Date Written: November 19, 2018
We extend research on investors’ motivated reasoning by examining how directional goals from holding a long or short position in a firm’s stock shape investors’ trading decisions. Results from laboratory markets suggest that traders holding a long position selectively overestimate the impact of transitory earnings on value when such items are prominently disclosed and are consistent with long traders’ incentivized directional preferences for higher earnings. By contrast, short traders do not exhibit motivated reasoning despite incentives that are symmetric with those of long traders. A follow-up study finds that a familiar contextual goal dampens the effect of a conflicting incentivized goal on judgments. Insofar as investors generally attune to a conventional preference for increasing market prices, this evidence provides a compelling explanation for asymmetric effects of directional goals on long and short traders’ decisions.
Keywords: earnings metrics, motivated reasoning, investors, short selling, earnings persistence
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