Rolling Mental Accounts
58 Pages Posted: 2 Sep 2015 Last revised: 21 Feb 2017
Date Written: April 10, 2016
When investors sell one asset and quickly buy another (“reinvestment days”), their trades suggest the original mental account is not closed, but is instead rolled into the new asset. Investors display a rolled disposition effect, selling the new position when its value exceeds the investment in the original position. On reinvestment days, investors display no disposition effect (consistent with no disutility from realizing a loss) and make better selling decisions. Mutual funds exhibit a larger disposition effect when outflows prevent them from rolling accounts. Using a laboratory experiment, we show that reinvestment causally reduces the disposition effect and improves trading.
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