Using data on the investments a large number of individual investors made through a discount broker from 1991 to 1996, we find that households exhibit a strong preference for local investments. We test whether this locality bias stems from information or from simple familiarity. The average household generates an additional annualized return of 3.2% from its local holdings relative to its nonlocal holdings, suggesting that local investors can exploit local knowledge. Excess returns to investing locally are even larger among stocks not in the S&P 500 index (firms for which information asymmetries between local and nonlocal investors may be largest).Behold, the fool saith, "Put not all thine eggs in the one basket"-which is but a manner of saying, "Scatter your money and your attention"; but the wise man saith, "Put all your eggs in one basket and-watch that basket."Mark Twain, 1894 THE FINANCE LITERATURE HAS YIELDED a large number of in-depth studies concerning the investments managed by professional money managers, yet historically, relatively little has been known about the individual investors' money management, in no small part because of the shortage of high-quality data available for academic research. This is despite the fact that United States individual investors have been holding around 50% of the stock market in direct stock investments.The key issue we address in this paper is the availability of asymmetric information in financial markets, particularly in the context of geography of investment by individual investors. While it is well understood that there may be a number of determinants of the availability and quality of information about a company, including, for example, company size, number of analysts following * Both authors are from the Department of Finance, University of Illinois at Urbana-Champaign.Scott Weisbenner is with the NBER. We would like to extend our gratitude to an anonymous discount broker for providing the data on individual investors' positions, trades, and demographics. Special thanks to Terry Odean for his help in obtaining and understanding the data set. We thank Alok Kumar, Allen Poteshman, Mark Seasholes, and an anonymous referee for useful insights and helpful discussions. Both authors acknowledge the financial support from the College Research Board at the University of Illinois at Urbana-Champaign. Finally, we thank seminar participants at the University of Illinois and the 2003 Western Finance Association Meetings for their comments and constructive suggestions. 268The Journal of Finance it, and media coverage, it is reasonable to hypothesize that, ceteris paribus, investors may be able to gather value-relevant information about the companies local to them (henceforth local companies) with greater ease and accuracy than they could about remote companies (henceforth nonlocal companies). Indeed, Coval and Moskowitz (2001) demonstrate that professional managers' local investments outperform their remote investments, a finding that both provides a richer character...

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This paper studies the relation between individuals' mutual fund flows and fund characteristics, establishing three key results. First, consistent with tax motivations, individual investors are reluctant to sell mutual funds that have appreciated in value and are willing to sell losing funds. Second, individuals pay attention to investment costs as redemption decisions are sensitive to both expense ratios and loads. Third, individuals' fund-level inflows and outflows are sensitive to performance, but in different ways. Inflows are related only to "relative" performance, suggesting that new money chases the best performers in an objective. Outflows are related only to "absolute" fund performance, the relevant benchmark for taxes. JEL Classification: G11; C41; D14; H20Keywords: Mutual fund flows; Individual investor portfolio choice; Tax-motivated trading  We thank an anonymous discount broker for providing data on individual investors' trades and Terry Odean for his help in obtaining and understanding the data set. Special thanks go to Joshua Pollet, Clemens Sialm, and Jay Wang for many insightful suggestions. We also thank seminar participants at the 2005 FEA Meetings at UNC (especially the discussant Jason Karceski), the 2006 EFA Meetings in Zürich (especially the discussant Daniel Bergstresser), the 2007 WFA Meetings in Big Sky, Montana (especially the discussant Sunil Wahal), Arizona State University, Florida State University, Hong Kong University of Science and Technology, Michigan State University, Nanyang Technological University, Purdue University, Queens University, Singapore Management University, the University of Illinois, the University of Indiana, the University of Münster, the University of Texas, and the University of Wisconsin for useful comments. Both authors acknowledge the financial support from the College Research Board at the University of Illinois at Urbana-Champaign. *Corresponding author.E-mail addresses: ivkovich@bus.msu.edu (Z. Ivković), weisbenn@uiuc.edu (S. Weisbenner). Individual investor mutual-fund flows AbstractThis paper studies the relation between individuals' mutual fund flows and fund characteristics, establishing three key results. First, consistent with tax motivations, individual investors are reluctant to sell mutual funds that have appreciated in value and are willing to sell losing funds. Second, individuals pay attention to investment costs as redemption decisions are sensitive to both expense ratios and loads. Third, individuals' fund-level inflows and outflows are sensitive to performance, but in different ways. Inflows are related only to "relative" performance, suggesting that new money chases the best performers in an objective. Outflows are related only to "absolute" fund performance, the relevant benchmark for taxes.JEL Classification: G11; C41; D14; H20

This paper establishes a causal relation between an individual's decision whether to own stocks and average stock market participation of the individual's community. We instrument for the average ownership of an individual's community with lagged average ownership of the states in which one's nonnative neighbors were born. Combining this instrumental variables approach with controls for individual and community fixed effects, a broad set of time-varying individual and community controls, and state-year effects rules out alternative explanations. To further establish that word-of-mouth communication drives this causal effect, we show that the results are stronger in more sociable communities.STANDARD MODELS OF PORTFOLIO CHOICE typically assume that fully informed investors make rational asset allocation decisions to maximize lifetime utility. As Ellison and Fudenberg (1995 P. 93) note, however, "economic agents must often make decisions without knowing the costs and benefits of the possible choices" and thus often "rely on whatever information they have obtained via causal word-of-mouth communication." Given the evidence that average U. (2004) finds that nearly one-half of defined contribution plan participants report that they have little or no investment knowledge and fewer than 20% consider themselves relatively knowledgeable. Moreover, many respondents think that employer stock is less risky than a stock fund. 1510The Journal of Finance This paper empirically examines the inf luence of "community effects," in the form of word-of-mouth communication, on the decision about whether to participate in the stock market. In addition to its importance at the individual level, equity market participation is also important at the aggregate level because of its ability to inf luence the size of the equity premium (Mankiw and Zeldes (1991), Heaton and Lucas (2000), Brav, Constantinides, and Gezcy (2002)). It is also relevant for a variety of public policies, ranging from the incidence of dividend tax policy to whether investing Social Security surpluses in private investments can have real effects on the economy (Abel (2001), Diamond and Geanakoplos (2003)).Whereas standard models of portfolio choice indicate that most households should have equity market exposure, only one-third of U.S. households own stocks or stock mutual funds outside of retirement plans, and only one-half participate in the stock market even when retirement plans are included into the calculation.2 There are numerous reasons to suspect that one's decision about whether or not to invest in stocks may be inf luenced by the stock market participation of one's community by means of social interaction. Hong, Kubik, and Stein (2004) present a formal model and discuss several possible pathways for this effect. For example, social interaction may serve as a mechanism for information exchange by means of word-of-mouth communication or "observational learning" (Banerjee (1992), Bikhchandani, Hirshleifer, and Welch (1992), Fudenberg (1993, 1995)). Si...

We study the stock trades of a large number of individual investors to investigate how tax incentives affect the realization of capital gains and losses. We compare investors' realization behavior in their taxable and tax-deferred accounts, and thereby identify the effect of taxes on trading decisions. We reach four conclusions. First, we find clear evidence of a lock-in effect for capital gains in taxable accounts relative to tax-deferred accounts. We find evidence of the "disposition effect," the tendency for investors to hold losses and sell gains, in both types of accounts and especially at short holding periods. The lock-in effect is stronger for large stock transactions than for small ones. Second, we find tax-loss selling throughout the calendar year, though it is most pronounced in December. Tax loss trading is more pronounced among investors who have realized capital gains elsewhere in the portfolio during the year. Third, we observe substantial heterogeneity in individual investors' propensity to trade. Controlling for this heterogeneity, however, does not alter the relation between a stock's past performance and the realization decision. Finally, we find that relatively few investors repurchase stocks that they have sold at a loss, even after the 30-day "wash sale" holding period has expired. † We thank an anonymous discount broker for providing data on individual investors' trades and Terry Odean for his help in obtaining and understanding the data set. We are grateful to Doug Bernheim, three anonymous referees, and seminar participants at the 2004 AEA meetings, the Chicago Graduate School of Business, the Universities of Connecticut, Illinois, Michigan, and Minnesota, and the NBER Public Economics Meetings for very helpful suggestions. Ivković and Weisbenner acknowledge the financial support from the College Research Board at the University of Illinois at Urbana-Champaign; Poterba thanks the National Science Foundation. 1The realization-based capital gains tax in the United States presents investors with important opportunities for tax management. Constantinides (1984) demonstrates that the optimal strategy for taxable investors is to realize losses while deferring the realization of capital gains. Many other studies, such as Ritter (1988), Poterba and Weisbenner (2001), and Grinblatt and Moskowitz (2004), note that taxpayers with accrued capital losses have an incentive to realize these losses before the end of the tax year and thereby to reduce their income tax liability. Such year-end tax-loss selling is often cited as a contributory factor in the unusual behavior of stock returns in late December and early January.While there is no general theory of why investors trade assets, a number of recent empirical studies, notably Odean (1998), Barber and Odean (2000 and Grinblatt and Keloharju (2001), have shown that asset and household characteristics are related to trading probabilities.These studies raise questions about whether investor behavior accords with the predictions of simple models ...