Asymmetric Motivated Reasoning in Investor Judgment

We test whether individuals with incentivized directional preferences akin to investors taking a long position in a stock are more prone to forming biased beliefs than individuals with incentives akin to those of short investors. Extending motivated reasoning theory with insights from psychology research on goal pursuit suggests that motivated reasoning is likely muted when the typical preference implied by a specific setting—what we refer to as a “conventional contextual preference”—is directionally inconsistent with an individual’s incentivized preference. Experiment 1 tests for such asymmetric motivated reasoning in an investing setting in which participants take either long or short positions. Results indicate that compared to a rational benchmark, long traders’ estimates of future stock price exhibit upward bias while short traders’ estimates are unbiased. Moreover, consistent with motivated reasoning as the process underlying these results, the magnitude of long traders’ bias becomes less pronounced as the amount of uncertainty in the information environment decreases. We examine the robustness and generality of these findings in supplemental analyses and a second experiment. Overall, our paper contributes new insights regarding the role of motivated reasoning in shaping investors’ judgments, and also speaks to the broader literature on bias in judgment and decision-making that spans multiple fields.