Doing Less With More

51 Pages Posted: 29 Dec 2018 Last revised: 15 Mar 2019

See all articles by Rawley Heimer

Rawley Heimer

Boston College - Department of Finance

Alex Imas

Carnegie Mellon University - Department of Social and Decision Sciences

Date Written: December 13, 2018


According to standard theories of decision-making, access to leverage should make investors better off. The ability to borrow expands investors' choice sets, allowing them to take advantage of trading opportunities without having to liquidate current holdings. This paper argues that leverage can interact with existing behavioral biases -- specifically, the reluctance to realize losses -- to impair decision-making and hurt performance. Two data sources provide support for this claim. First, we exploit regulation that restricts the amount of leverage available to U.S. retail traders of foreign exchange. Traders constrained by the regulation are more willing to realize losses, exhibiting a smaller disposition effect, and improve their market timing. We replicate these findings in an experimental asset market. Access to leverage leads to significantly lower earnings. This decrease in performance is driven by levered participants holding on to losses for longer, deviating further from an optimal trading strategy than those without access to leverage. Together, our findings imply more choice may not always be better than less and suggest scope for policy to improve financial decision-making.

Keywords: Loss Chasing, Disposition Effect, Prospect Theory, Behavioral Finance

JEL Classification: G02, G11, D03, D18

Suggested Citation

Heimer, Rawley and Imas, Alex, Doing Less With More (December 13, 2018). 9th Miami Behavioral Finance Conference 2018. Available at SSRN: or

Rawley Heimer (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

Alex Imas

Carnegie Mellon University - Department of Social and Decision Sciences ( email )

Pittsburgh, PA 15213-3890
United States

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