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Culture vs. Bias: Can Social Trust Mitigate the Disposition Effect?

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  • Massa, Massimo
  • li, jennifer
  • Zhang, Hong

Abstract

We examine whether the investors sensitivity to behavioral biases is influenced by the social norms they are exposed to. We focus on the disposition effect of mutual fund investors. We consider two competing hypotheses. On the one hand, trust, by increasing the credibility of the numbers reported by the fund managers elicits stronger investor reactions. This results in a higher flow-performance sensitivity, which mitigates the tendency of selling winners and holding onto losers. One the other hand, societal trust, reducing the concern of expropriation, lowers the necessity for investors to react to bad performance. The resulting lower flow-performance sensitivity increases the disposition effect. Based on a proprietary dataset of the complete account-level trading information for all investors of a mutual fund family in China, we find compelling evidence that: 1) fund investors exhibit disposition effect; 2) a higher degree of social trust is associated with higher flow-performance-sensitivity; 3) (high) trust-induced flows mitigate the disposition effect. Our results suggest that behavioral bias may be strongly influenced by social norms.

Suggested Citation

  • Massa, Massimo & li, jennifer & Zhang, Hong, 2016. "Culture vs. Bias: Can Social Trust Mitigate the Disposition Effect?," CEPR Discussion Papers 11474, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11474
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    References listed on IDEAS

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    Cited by:

    1. Syed Aliya Zahera & Rohit Bansal, 2018. "Do investors exhibit behavioral biases in investment decision making? A systematic review," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 10(2), pages 210-251, May.

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    Keywords

    Trust; The disposition effect; Mutual funds;
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