Iñigo Iturbe (Universidad de Alicante)

Cognitive dissonance, investor beliefs and the disposition effect

Abstract

The disposition effect (DE) refers to the greater tendency of investors to sell assets that
have appreciated since purchase, compared to assets that have depreciated. According to
Cognitive Dissonance Theory (CDT), the DE may occur because investors distort their
beliefs about assets that they have chosen, becoming less responsive to negative
information. We test this key prediction of CDT in the laboratory by studying subjects’
beliefs in a standard investment task. In one treatment, we randomly assign a portfolio of
assets to each participant, while in a second treatment subjects must choose the assets. As
predicted by CDT, we find that in the latter treatment, subjects’ price forecasts are overly
optimistic and fail to incorporate negative information.
For any information please contact N. Iriberri

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