The Consumption Effects of the Disposition to Sell Winners and Hold on to Losers



Using a large sample of transaction-level data on all security trades and holdings as well as all spending and income from an online retail bank, we study the effects of a fictitious sale initiated by the bank that changed the displayed purchase prices of all mutual funds in individuals' portfolios. We find that individuals are more likely to sell fictitious winners, i.e., funds that are displayed as winners under the new purchase price but are losers under the actual purchase price. Beyond affecting individual's disposition to sell winners and hold on to losers, we also document that individual consumption increases in response to realizing fictitious capital gains. To the best of our knowledge, this is the first study documenting a causal link between purchase prices and trades using observational data and finding that the disposition to sell winning investments has real effects in terms of affecting individual consumption. Additionally, our finding that the subjective feeling of investment success and fictitiously changed capital gains affect consumption is informative for the marginal propensity to consume out of stock market wealth