Fully Closed: Individual Responses to Realized Gains and Losses

Steffen Meyer, Michaela Pagel*

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

We analyze how individuals reinvest realized capital gains and losses exploiting plausibly exogenous sales due to mutual fund liquidations. Individuals reinvest 83% if a forced sale results in a gain relative to the initial investment; but reinvest only 40% in the event of a loss. This difference is statistically significant for more than six months and arises because many individuals forced to realize a loss choose not to reinvest anything and some even exit the stock market altogether. Individuals treat realized losses differently from paper losses and are discouraged from investing more and participating in the stock market.

Original languageEnglish
JournalThe Journal of Finance
Volume77
Issue number3
Pages (from-to)1529-1585
ISSN0022-1082
DOIs
Publication statusPublished - Jun 2022

Keywords

  • Individual investors
  • Investment
  • Behavioral Finance
  • Mutual funds

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