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

Tom Y. Chang, David H. Solomon, and Mark M. Westerfield
Journal of Finance 2016, 71(1): 267-302
Media: Financial Times, CNN Money, Psychology Today, The Motley Fool, Value Walk.

[PDF] [Journal Version] [SSRN Version]

Summary

Investors in most assets are more likely to sell gains than losses, but mutual fund investors do the opposite. Using brokerage data and an experiment, we argue that cognitive dissonance can explain these results and the effects of delegation more generally.

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 non-delegated assets like individual stocks; delegated assets, like mutual funds, exhibit a robust reverse-disposition effect. In an experiment, we show increasing investors’ cognitive dissonance results in both a larger disposition effect in stocks and also 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.

Cite as

Chang, Tom Y., David H. Solomon, and Mark M. Westerfield. 2016. “Looking for Someone to Blame: Delegation, Cognitive Dissonance, and the Disposition Effect.” Journal of Finance 71(1): 267–302. https://doi.org/10.1111/jofi.12311

BibTeX

@article{ChangSolomonWesterfield2016,
  author  = {Chang, Tom Y. and Solomon, David H. and Westerfield, Mark M.},
  title   = {Looking for Someone to Blame: Delegation, Cognitive Dissonance, and the Disposition Effect},
  journal = {Journal of Finance},
  year    = {2016},
  volume  = {71},
  number  = {1},
  pages   = {267--302},
  doi     = {10.1111/jofi.12311},
  url     = {https://doi.org/10.1111/jofi.12311}
}

The PDF posted here is the authors’ manuscript (October 2014 draft). The version of record is available from the journal at the DOI above. Updated October 5, 2026.