Fully Closed: Individual Responses to Realized Gains and Losses

Steffen Meyer and Michaela Pagel

Journal of Finance, 2022, vol. 77, issue 3, 1529-1585

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.

Date: 2022
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https://doi.org/10.1111/jofi.13122

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:77:y:2022:i:3:p:1529-1585

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