THE STABILITY PARADOX: A STUDY OF COGNITIVE DISSONANCE IN HIGH-LEVERAGE RETAIL RISK PREFERENCES

Abstract

This study aims to explore a widespread phenomenon among high-leverage retail investors in China’s futures market that can be termed a “stability paradox.” That is, investors express an extremely strong desire at the subjective level for “long-term stable profits” or even “financial freedom,” yet in actual trading they display highly risk-seeking behavior, such as taking oversized positions, stubbornly holding against the trend, and trading frequently. This behavioral pattern is characterized, in terms of mathematical expectation, by high variance and negative returns . Based on Huishang Futures Co., Ltd.’s 2019 client survey data (valid samples N = 773) and the “2021 National Futures Market Trader Status Survey Report” released by the China Futures Association (N = 6034), this paper adopts a mixed-methods approach that combines quantitative statistics and qualitative textual analysis to examine in depth the psychological mechanisms behind this “knowing–doing gap.”

The study finds that 95.34% of respondents cognitively acknowledge that futures investing requires professional learning and strict rules. However, at the execution level, 46.05% of traders admit to “having a plan but being unable to execute it,” and 35.06% explicitly state that they “cannot stop loss in time.” Qualitative data further reveal that investors resort to “external attribution” (such as complaining about manipulation by large players or excessively high commissions) to alleviate the cognitive dissonance arising from violating their own trading discipline. This paper argues that high leverage not only amplifies asset price volatility but also greatly magnifies investors’ mental-accounting biases, causing them to fall into a vicious cycle of “pursuing (imagined) quick stability by adopting (in reality) extremely unstable strategies.”