Cognitive Dissonance and Mutual Fund Investors
AbstractWe 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 supervisorship. These show that the effect is confined to the top quartile. We find little evidence that the response to poor performance is unusual.
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Bibliographic InfoArticle provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.
Volume (Year): 20 (1997)
Issue (Month): 2 (Summer)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0270-2592
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