Taxing the Disposition Effect: The Impact of Tax Awareness on Investor Behavior

Journal of Financial and Quantitative Analysis

80 Pages Posted: 25 Jul 2019 Last revised: 14 Feb 2021

See all articles by William Bazley

William Bazley

University of Kansas

Jordan Moore

Rowan University - Accounting & Finance

Melina Murren Vosse

University of Miami

Date Written: February 9, 2021

Abstract

Standard portfolio choice models predict that investors consider the tax implications of trading. However, individuals are disposed toward realizing gains and holding losing investments, behaviors that worsen their performance. We show, in an experimental market, that increasing tax salience reduces the disposition effect between 22% and 47%, leading to higher portfolio balances without increasing total trading activity. Using field data, we find that investors' disposition is sensitive to taxes around tax rate changes, when taxes are likely salient. Our analysis demonstrates that increasing tax awareness can affect households' portfolio choices, which suggests policy implications for improving financial decision-making.

Keywords: Disposition effect, individual investors, tax salience, behavioral finance

JEL Classification: D14, D91, G11

Suggested Citation

Bazley, William and Moore, Jordan and Murren Vosse, Melina, Taxing the Disposition Effect: The Impact of Tax Awareness on Investor Behavior (February 9, 2021). Journal of Financial and Quantitative Analysis, Available at SSRN: https://ssrn.com/abstract=3425930 or http://dx.doi.org/10.2139/ssrn.3425930

William Bazley (Contact Author)

University of Kansas ( email )

3143 Capitol Federal Hall
1654 Naismith Drive
Lawrence, KS 66045
United States

Jordan Moore

Rowan University - Accounting & Finance ( email )

Glassboro, NJ 08028
United States

Melina Murren Vosse

University of Miami ( email )

Coral Gables, FL 33124
United States

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