Transferring cognitive talent across domains to reduce the disposition effect in investment

Kristian Rotaru, Petko S. Kalev, Nitin Yadav, Peter Bossaerts

Research output: Contribution to journalArticleResearchpeer-review

Abstract

We consider Theory of Mind (ToM), the ability to correctly predict the intentions of others. To an important degree, good ToM function requires abstraction from one’s own particular circumstances. Here, we posit that such abstraction can be transferred successfully to other, non-social contexts. We consider the disposition effect, which is a pervasive cognitive bias whereby investors, including professionals, improperly take their personal trading history into account when deciding on investments. We design an intervention policy whereby we attempt to transfer good ToM function, subconsciously, to personal investment decisions. In a within-subject repeated-intervention laboratory experiment, we record how the disposition effect is reduced by a very significant 85%, but only for those with high scores on the social-cognitive dimension of ToM function. No such transfer is observed in subjects who score well only on the social-perceptual dimension of ToM function. Our findings open up a promising way to exploit cognitive talent in one domain in order to alleviate cognitive deficiencies elsewhere.

Original languageEnglish
Article number23068
Number of pages9
JournalScientific Reports
Volume11
Issue number1
DOIs
Publication statusPublished - Dec 2021

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