Rolling Mental Accounts

When investors sell one asset and quickly buy another (“reinvestment days”), their trades suggest the original mental account is not closed, but is instead rolled into the new asset. Retail investors trading on their own accounts display a rolled disposition effect, selling the new position when its...

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Bibliographic Details
Published in:The Review of financial studies 2018-01, Vol.31 (1), p.362-397
Main Authors: Frydman, Cary, Hartzmark, Samuel M., Solomon, David H.
Format: Article
Language:English
Subjects:
Accounts
Assets
Investors
Reinvestment
Studies
Trading
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Summary:When investors sell one asset and quickly buy another (“reinvestment days”), their trades suggest the original mental account is not closed, but is instead rolled into the new asset. Retail investors trading on their own accounts display a rolled disposition effect, selling the new position when its value exceeds the initial investment in the original position. On reinvestment days, these investors display no disposition effect (consistent with no disutility from realizing a loss) and make better selling decisions. Using a laboratory experiment, we show that reinvestment causally reduces the disposition effect and improves trading.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhx042