Individual Responses to Realized Gains and Losses
72 Pages Posted: 8 Jul 2021
Date Written: June 24, 2021
We analyze how individuals reinvest realized capital gains and losses exploiting plausibly exogenous sales due to mutual fund liquidations. Individuals reinvest 83% if a forced sale results in a gain relative to the initial investment; however, they reinvest only 40% in the event of a loss. This difference is statistically significant for more than six months. It arises because many individuals forced to realize a loss choose not to reinvest anything, and some even exit the stock market altogether. Individuals treat realized losses differently from paper losses and are discouraged from investing more and participating in the stock market.
JEL Classification: G5, D90, G41, D14
Suggested Citation: Suggested Citation