Template-Type: ReDIF-Paper 1.0
Title: Locus of Control and Consistent Investment Choices
Author-Name: Pia Pinger
Author-Email: 
Author-Name: Sebastian Schäfer
Author-Email: 
Author-Name: Heiner Schumacher
Author-Email:
Classification-JEL: D03, G02, C91

Keywords: Locus of Control, Risk Preferences, Investment Decisions, Cognitive Ability


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.

Note: 
Length: 36
Creation-Date: 2018-05
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp015
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2018_015