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

Posted: 25 Jul 2019

See all articles by William J. Bazley

William J. Bazley

University of Kansas

Jordan Moore

Rowan University - Accounting & Finance

Melina Murren Vosse

University of Miami

Date Written: July 23, 2019

Abstract

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

Bazley, William J. and Moore, Jordan and Murren Vosse, Melina, Taxing the Disposition Effect: The Impact of Tax Awareness on Investor Behavior (July 23, 2019). Available at SSRN: https://ssrn.com/abstract=3425930 or http://dx.doi.org/10.2139/ssrn.3425930

William J. 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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