Taxing the Disposition Effect: The Impact of Tax Awareness on Investor Behavior
Posted: 25 Jul 2019
Date Written: July 23, 2019
Canonical portfolio choice models suggest that investors should consider the tax implications of trading. Using field data, we show that individual trading behavior is sensitive to effective capital gains tax rates when rates are likely salient, such as during regime changes. In an experimental market setting, increasing the salience of tax consequences reduces the disposition effect by more than 40%, leading to higher portfolio balances with no significant change in total trading activity. We demonstrate that increasing tax awareness, particularly through visual cues, can impact individuals' portfolio choices, which implies potential for policy to improve financial decision-making.
Keywords: disposition effect, individual investors, tax salience, visual finance
JEL Classification: D14, D91, G11
Suggested Citation: Suggested Citation