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Journal of Finance Vol. 71 No. 1 2016

Looking for Someone to Blame: Delegation, Cognitive Dissonance, and the Disposition Effect

Tom Y. Chang1; David H. Solomon2,3; Mark M. Westerfield4

1 Chang and Solomon are with the University of Southern California, and Westerfield is with the University of Washington. We would like to thank Nick Barberis, Zahi Ben-David, Ekaterina Chernobai, Bill Christie, Lucas Coffman, Harry DeAngelo, Wayne Ferson, Cary Frydman, Mark Grinblatt, Jarrad Harford, · 2 University of Southern California · 3 California Southern University · 4 University of Washington

Abstract

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.

DOI
10.1111/jofi.12311
Volume
71
Issue
1
Pages
267-302
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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