Cognitive dissonance theory explains why investors make poor financial decisions.
The article explores why some investors tend to sell successful investments too early and hold onto losing ones for too long, known as the disposition effect. Previous explanations like return expectations and risk aversion don't fully explain this behavior. Instead, the author suggests that cognitive dissonance theory, which deals with feeling conflicted about decisions, may better explain the disposition effect. This theory is supported by research on entrapment, escalating commitment, and sunk cost, which study similar behaviors.