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Looking for Someone to Blame: Delegation, Cognitive Dissonance, and the Disposition Effect
Author(s) -
CHANG TOM Y.,
SOLOMON DAVID H.,
WESTERFIELD MARK M.
Publication year - 2016
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12311
Subject(s) - cognitive dissonance , disposition effect , salience (neuroscience) , delegation , mutual fund , blame , disposition , business , intermediation , economics , monetary economics , microeconomics , psychology , social psychology , finance , cognitive psychology , management , paleontology , context (archaeology) , biology
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 nondelegated assets like individual stocks; delegated assets, like mutual funds, exhibit a robust reverse‐disposition effect. In an experiment, we show that increasing investors' cognitive dissonance results in both a larger disposition effect in stocks and 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.