The Relation of the Disposition Effect to Mutual Fund Trades and Performance

Abstract

We document that, on average, U.S. equity mutual funds prefer realizing capital losses rather than capital gains. A substantial fraction of the sample, however, exhibits the opposite tendency of realizing gains more readily than losses. The documented tendency for this subset appears to be due to the disposition effect. When funds experience outflows and are managed by teams of portfolio managers, they appear more susceptible to sell disproportionately more winners than losers. Disposition-driven behavior affects mutual fund investment styles, causing lower market betas and characteristics of value-oriented and short-term contrarian styles but does not affect mutual fund performance.

Keywords: Mutual funds, disposition effect, flows, behavioral biases, performance, style

JEL Classification: G1, G2