The Effect of Cognitive Dissonance on Investors’ Expectations

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We study whether investors become irrationally optimistic after purchasing assets. We design two experiments, one in the laboratory and the other online. As a control group we use individuals who own the same asset, but who have not actively purchased it, even though they would have done so if they had had that option. In both experiments we find that individuals who have actively decided to purchase an asset are overly optimistic about its performance. This may explain the existence of the disposition effect, one of the biggest anomalies in behavioral finance.


Keywords: Cognitive Dissonance, Investors' Expectations, Irrational Optimism