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Locus of control and consistent investment choices

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  • Pinger, Pia
  • Schäfer, Sebastian
  • Schumacher, Heiner

Abstract

We document that an internal locus of control can be hindering in financial market situations, where short-term outcomes are determined by chance. The reason is that internally controlled individuals may tend to (over-)react to random outcomes. Our evidence is based on an experiment in which subjects repeatedly invest in two identical, uncorrelated, risky assets and observe previous outcome realizations. Under mild restrictions, the optimal strategy is to make the same choice in each period. Yet, internals are more likely to make inconsistent risk choices. The effect size of locus of control is comparable with that of cognitive ability. Among inconsistent subjects, average switching behavior is in line with the gambler’s fallacy. However, choices of very internally controlled individuals tend to correspond to the hot hand fallacy.

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  • Pinger, Pia & Schäfer, Sebastian & Schumacher, Heiner, 2018. "Locus of control and consistent investment choices," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 75(C), pages 66-75.
    • Handle: RePEc:eee:soceco:v:75:y:2018:i:c:p:66-75
    DOI: 10.1016/j.socec.2018.05.004
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    2. Mesplé-Somps, Sandrine & Nilsson, Björn, 2023. "Role models, aspirations and desire to migrate," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 819-839.
    3. Marco Caliendo & Juliane Hennecke, 2022. "Drinking is different! Examining the role of locus of control for alcohol consumption," Empirical Economics, Springer, vol. 63(5), pages 2785-2815, November.
    4. Humphrey, Steven J. & Mondorf, Stefan, 2021. "Testing the causes of betrayal aversion," Economics Letters, Elsevier, vol. 198(C).
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    6. Cheng, Zhiming & Guo, Liwen & Smyth, Russell & Tani, Massimiliano, 2022. "Childhood adversity and energy poverty," Energy Economics, Elsevier, vol. 111(C).
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    8. S Kannadas & Mousumi Sengupta, 2023. "Impact of Locus of Control on Financial Risk-Taking Behaviour: A Perception Study among Married Earning Women in India," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 5, pages 143-159.
    9. Dietmar Fehr & Yannick Reichlin, 2021. "Status, Control Beliefs, and Risk-Taking," CESifo Working Paper Series 9253, CESifo.
    10. Awaworyi Churchill, Sefa & Smyth, Russell, 2022. "Local area crime and energy poverty," Energy Economics, Elsevier, vol. 114(C).
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    More about this item

    Keywords

    Locus of control; Risk preferences; Investment decisions; Cognitive ability;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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