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Fully Closed: Individual Responses to Realized Gains and Losses

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  • STEFFEN MEYER
  • MICHAELA PAGEL

Abstract

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; but reinvest only 40% in the event of a loss. This difference is statistically significant for more than six months and 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.

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  • Steffen Meyer & Michaela Pagel, 2022. "Fully Closed: Individual Responses to Realized Gains and Losses," Journal of Finance, American Finance Association, vol. 77(3), pages 1529-1585, June.
    • Handle: RePEc:bla:jfinan:v:77:y:2022:i:3:p:1529-1585
    DOI: 10.1111/jofi.13122
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