Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/180555
Authors: 
Pinger, Pia
Schäfer, Sebastian
Schumacher, Heiner
Year of Publication: 
2018
Series/Report no.: 
IZA Discussion Papers 11537
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.
Subjects: 
locus of control
risk preferences
investment decisions
cognitive ability
JEL: 
D03
G02
C91
Document Type: 
Working Paper
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