Fully Closed: Individual Responses to Realized Gains and Losses

Steffen Meyer, Michaela Pagel

NBER Working Paper No. 25542
Issued in February 2019
NBER Program(s):Asset Pricing Program

We use transaction-level data of portfolio trades and holdings linked to checking, savings, and settlement account transactions and balances to explore how individuals respond to realized capital gains and losses. We exploit plausibly exogenous sales due to mutual fund liquidations for identification. Specifically, we estimate the marginal propensity to reinvest out of one dollar received from a forced liquidation, when the investor either achieved a gain or a loss relative to his or her initial investment. Theoretically, if individuals held optimized portfolios, the marginal propensity to reinvest out of forced sales should be 100%. Individuals should just reinvest all of their liquidity immediately into a fund with similar characteristics. Empirically, individuals reinvest 83% on average if the forced sale resulted in a gain, but only 40% in the event of a loss. If individuals do not reinvest, they keep a share of their newly found liquidity in cash, save it, or consume it. Such differential treatment of gains and losses is inconsistent with active rebalancing or tax considerations, but consistent with mental accounting and the idea that individuals treat realized losses differently than paper losses. We thus provide evidence for realization utility and effects (Barberis and Xiong, 2012; Imas, 2016) and that individuals do not appear to learn rationally from experiences in the stock market (Malmendier and Nagel, 2011; Koudijs and Voth, 2016).

You may purchase this paper on-line in .pdf format from ($5) for electronic delivery.

Access to NBER Papers

You are eligible for a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.


Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w25542

NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us