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

We study the effects of an exogenous change in the displayed purchase prices of all mutual funds in individuals' portfolios using data on all security trades, holdings, spending, and income from an online retail bank. 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 prices but are losers under the actual purchase prices. We then show that individual consumption increases in response to realizing fictitious winners, i.e., realizing fictitious capital gains even though the investors are subject to actual capital losses. The effects of fictitious capital gains on trading and consumption are more prevalent for less-informed investors. This marginal propensity to consume out of (confused) capital gains is thus informative about the literature on consumption out of stock market wealth