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

44 Pages Posted: 10 Nov 2016 Last revised: 24 Jan 2017

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: November 7, 2016


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. Available at SSRN: or

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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