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

44 Pages Posted: 10 Nov 2016 Last revised: 29 Oct 2020

See all articles by Jennifer (Jie) LI

Jennifer (Jie) LI

INSEAD; Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Massimo Massa

INSEAD - Finance

Hong Zhang

Singapore Management University, LKCSB; Tsinghua University - PBC School of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: November 7, 2016

Abstract

We examine whether investor behavior can be influenced by the social norms to which they are exposed. Specifically, we test two competing hypotheses regarding the influence of social trust on the disposition effect related to mutual fund investment. On the one hand, a higher level of social trust may elicit stronger investor reactions by increasing the credibility of the performance numbers reported by funds. This results in higher flow-performance sensitivity, which mitigates investors’ tendency to sell winners and hold onto losers. On the other hand, societal trust may reduce concerns about expropriation, thereby weakening investors’ need to react to poor performance. The resulting lower flow-performance sensitivity increases the disposition effect. Based on a proprietary dataset of complete account-level trading information for all investors in a large mutual fund family in China, we find compelling evidence 1) of a significant disposition effect among fund investors; 2) that a higher degree of social trust is associated with higher flow-performance sensitivity; and 3) that (high) trust-induced flows mitigate the disposition effect. Our results suggest that, in addition to cognitive biases, investor behavior is also strongly influenced by social norms.

Keywords: Trust, The Disposition Effect, Mutual Funds

Suggested Citation

LI, Jennifer (Jie) and Massa, Massimo and Zhang, Hong, Culture vs. Bias: Can Social Trust Mitigate the Disposition Effect? (November 7, 2016). INSEAD Working Paper No. 2016/86/FIN, Asian Finance Association (AsianFA) 2017 Conference, PBCSF-NIFR Research Paper, Available at SSRN: https://ssrn.com/abstract=2865701 or http://dx.doi.org/10.2139/ssrn.2865701

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
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Massimo Massa

INSEAD - Finance ( email )

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Hong Zhang

Singapore Management University, LKCSB ( email )

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Tsinghua University - PBC School of Finance ( email )

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HOME PAGE: http://www.hongzhang.info

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