• Disposition Effect, Escalation of Commitment and Mutual Fund Performance

Abstract

Research on organizational behavior finds that corporate executives suffer from the bias of escalation of commitment in that they tend to invest more time, money, and labor in losing projects. Research on empirical finance also finds that individual investors are exposed to the disposition effect in that they tend to hold losers too long and sell winners too early. We investigate if mutual fund managers also suffer from these two effects and their impacts. Our results can be summarized as follows. First, fund managers do commit both biases, and these biases have significant negative impacts on mutual fund performance. Second, the escalation of commitment has a more negative impact on mutual fund performance than the disposition effect. Finally, the disposition effect and the escalation of commitment effects are stronger for larger and younger mutual funds.

Keywords: Fund performance; Disposition; Escalation of Commitment