Taxing the Disposition Effect: The Impact of Tax Awareness on Investor Behavior

Authors

William Bazley
Jordan Moore, Rowan UniversityFollow
Melina Murren Vosee

Document Type

Article

Version Deposited

Accepted for publication (PostPrint)

Publication Date

2021

Publication Title

Journal of Financial and Quantitative Analysis

Abstract

Standard portfolio choice models predict that investors consider the tax implications of trading. However, individuals are disposed toward realizing gains and holding losing investments, behaviors that worsen their performance. We show, in an experimental market, that increasing tax salience reduces the disposition effect between 22% and 47%, leading to higher portfolio balances without increasing total trading activity. Using field data, we find that investors' disposition is sensitive to taxes around tax rate changes, when taxes are likely salient. Our analysis demonstrates that increasing tax awareness can affect households' portfolio choices, which suggests policy implications for improving financial decision-making.

Comments

This is a pre-publication copy deposited in SSRN.

Recommended Citation

Bazley, William and Moore, Jordan and Murren Vosse, Melina, Taxing the Disposition Effect: The Impact of Tax Awareness on Investor Behavior (February 9, 2021). Journal of Financial and Quantitative Analysis, Available at SSRN: https://ssrn.com/abstract=3425930 or http://dx.doi.org/10.2139/ssrn.3425930