Carlos Cueva, University of Alicante

“Cognitive dissonance and investor beliefs: An experiment”

Abstract

Cognitive dissonance theory proposes that individuals tend to manipulate their beliefs when these might otherwise conflict with their self-image. Despite its recent popularity in behavioral finance as a unified explanation for important puzzles such as the disposition effect, little is known about the effect of cognitive dissonance on beliefs. In this experiment, subjects participate in an investment task and provide price forecasts under various conditions which should turn on or off cognitive dissonance. In line with the theory, our results show that beliefs are unresponsive to negative signals only for assets that have been personally purchased by subjects, while in other circumstances they are consistent with Bayesian updating.

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