Escalation of Commitment: Evidence from Taiwanese Fund Managers

摘要

Investors not only hold losing stocks too long but also remain committed to buy them. The aim of this study is to examine the effects of psychological factors on mutual fund managers' escalation of commitment. Psychological factors including sunk cost, self-justification, and overconfidence are used to test the escalation hypotheses. A set of sample consisting of 98 open-end equity funds is employed to execute this analysis. Balanced panel data over 2year period is obtained from Taiwanese Economic Journal (TEJ). Empirical results reveal that the effect of sunk cost on escalation of commitment is significantly positive, which implies sunk cost is a significant factor influencing fund managers' escalation to losing stocks. Performance rank as a monitoring-driven instrument could mitigate fund managers' propensity of escalation of commitment. To avoid misallocating fund resources, fund managers should try to mitigate their escalation of commitment and fund institutions can build an early warning system to execute the monitoring.