Discussion Paper Details
Please find the details for DP11474 in an easy to copy and paste format below:
Title: Culture vs. Bias: Can Social Trust Mitigate the Disposition Effect?
Author(s): Jennifer Li, Massimo Massa and Hong Zhang
Publication Date: August 2016
Keyword(s): Mutual funds, The Disposition Effect and Trust
Programme Area(s): Financial Economics
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.
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Li, J, Massa, M and Zhang, H. 2016. 'Culture vs. Bias: Can Social Trust Mitigate the Disposition Effect?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11474