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COGNITIVE DISSONANCE AND MUTUAL FUND INVESTORS
Author(s) -
Goetzmann William N.,
Peles Nadav
Publication year - 1997
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1997.tb00241.x
Subject(s) - mutual fund , cognitive dissonance , equity (law) , economics , phenomenon , cognition , actuarial science , psychology , financial economics , social psychology , finance , political science , physics , quantum mechanics , neuroscience , law
We present evidence from questionnaire responses of mutual fund investors about recollections of past fund performance. We find that investor memories exhibit a positive bias, consistent with current psychological models. We find that the degree of bias is conditional upon previous investor choice, a phenomenon related to the well‐known theory of cognitive dissonance. Psychological and economic frictions in the mutual fund industry are examined via a cross‐sectional study of equity mutual funds. We find an unusually high frequency of poorly performing funds, consistent with investor “inertia.” We also examine the differential responses of investment dollars to past performance, controlling for survivorship. These show that the effect is confined to the top quartile. We find little evidence that the response to poor performance is unusual.