Locus of Control and Consistent Investment Choices

37 Pages Posted: 30 May 2018

See all articles by Pia R. Pinger

Pia R. Pinger

University of Bonn

Sebastian Schaefer

Goethe University Frankfurt

Heiner Schumacher

KU Leuven - Faculty of Business and Economics (FEB)

Abstract

We document that an internal locus of control can be hindering in financial market situations, where short-term outcomes are determined by chance. The reason is that internally controlled individuals may tend to (over-)react to random outcomes. Our evidence is based on an experiment in which subjects repeatedly invest in two identical, uncorrelated, risky assets and observe previous outcome realizations. Under mild restrictions, the optimal strategy is to make the same choice in each period. Yet, internals are more likely to make inconsistent risk choices. The effect size of locus of control is comparable with that of cognitive ability. Among inconsistent subjects, average switching behavior is in line with the gambler's fallacy. However, choices of very internally controlled individuals tend to correspond to the hot hand fallacy.

Keywords: locus of control, risk preferences, investment decisions, cognitive ability

JEL Classification: D03, G02, C91

Suggested Citation

Pinger, Pia R. and Schaefer, Sebastian and Schumacher, Heiner, Locus of Control and Consistent Investment Choices. IZA Discussion Paper No. 11537. Available at SSRN: https://ssrn.com/abstract=3185230

Pia R. Pinger (Contact Author)

University of Bonn ( email )

Sebastian Schaefer

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Heiner Schumacher

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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