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Locus of Control and Consistent Investment Choices

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  • Pia Pinger
  • Sebastian Schäfer
  • Heiner Schumacher

Abstract

We document that an internal locus of control can be hindering in financial mar- ket situations, where short-term outcomes are determined by chance. The reason is that internally controlled individuals may tend to (over-)react to random out- comes. Our evidence is based on an experiment in which subjects repeatedly invest in two identical, uncorrelated, risky assets and observe previous outcome realiza- tions. 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 fal- lacy. However, choices of very internally controlled individuals tend to correspond to the hot hand fallacy.

Suggested Citation

  • Pia Pinger & Sebastian Schäfer & Heiner Schumacher, 2018. "Locus of Control and Consistent Investment Choices," CRC TR 224 Discussion Paper Series crctr224_2018_015, University of Bonn and University of Mannheim, Germany.
  • Handle: RePEc:bon:boncrc:crctr224_2018_015
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    5. Humphrey, Steven J. & Mondorf, Stefan, 2021. "Testing the causes of betrayal aversion," Economics Letters, Elsevier, vol. 198(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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