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

We use individual-level data on all security trades, holdings, spending, and income from an online retail bank. We study the effects of an exogenous change in the displayed purchase prices of the mutual funds in individuals’ portfolios. We find that individuals are more likely to sell what we call fictitious winners, i.e., funds that are winners under the newly displayed purchase price but are losers under the actual purchase price. We also document that individual consumption increases in response to realizing fictitious capital gains. We thus document a causal link among purchase prices, trades, and consumption using observational data and find that the trading and consumption results are more prevalent for less-informed investors. We thereby document a marginal propensity to consume out of (confused) capital gains, which is informative about the literature on consumption out of stock market wealth.