The Consumption Effects of the Disposition to Sell Winners and Hold Losers

Abstract

Do retail investors’ behavioral biases in trading directly affect their consumption out of stock market wealth? We exploit a natural experiment that changed the displayed purchase prices in investors’ online portfolios. Investors are more likely to sell and consume on average 25% of “fictitious” capital gains, i.e., displayed capital gains under the new purchase prices that are capital losses under the actual purchase prices. We argue that investors are selectively inattentive: they are more responsive when fictitious gains are larger and actual losses are smaller, they notice fictitious losses, and they react even when actual purchase prices are very salient.