Culture vs. Bias: Can Social Trust Mitigate the Disposition Effect?

50 Pages Posted: 6 Sep 2016

See all articles by Jennifer (Jie) LI

Jennifer (Jie) LI


Massimo Massa

INSEAD - Finance

Hong Zhang

Tsinghua University - PBC School of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 2016


We examine whether the investors sensitivity to behavioral biases is influenced by the social norms they are exposed to. We focus on the disposition effect of mutual fund investors. We consider two competing hypotheses. On the one hand, trust, by increasing the credibility of the numbers reported by the fund managers elicits stronger investor reactions. This results in a higher flow-performance sensitivity, which mitigates the tendency of selling winners and holding onto losers. One the other hand, societal trust, reducing the concern of expropriation, lowers the necessity for investors to react to bad performance. The resulting lower flow-performance sensitivity increases the disposition effect. Based on a proprietary dataset of the complete account-level trading information for all investors of a mutual fund family in China, we find compelling evidence that: 1) fund investors exhibit disposition effect; 2) a higher degree of social trust is associated with higher flow-performance-sensitivity; 3) (high) trust-induced flows mitigate the disposition effect. Our results suggest that behavioral bias may be strongly influenced by social norms.

Keywords: Mutual funds, The Disposition Effect, Trust

Suggested Citation

LI, Jennifer (Jie) and Massa, Massimo and Zhang, Hong, Culture vs. Bias: Can Social Trust Mitigate the Disposition Effect? (August 2016). CEPR Discussion Paper No. DP11474. Available at SSRN:

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Hong Zhang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083


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