Attention and Biases: Evidence from Tax-Inattentive Investors

Abstract

Using bunching induced by a policy notch for identication, we rst provide evidence of investor inattention to a very simple and well-known capital-gains tax exemption in the Brazilian stock market. We then show that tax-inattentive investors exhibit stronger behavioral biases and worse trading performance, even after controlling for several investor-level variables such as trading experience, observed performance,nancial sophistication, age, and occupation. This is consistent with inattention being a common source of behavioral biases.

Taxing the Disposition Effect: The Impact of Tax Awareness on Investor Behavior

“…Specifically, it declines in December, when investors could be potentially cognizant of capital gains taxes. Second, recent evidence suggests that salience, particularly tax salience (e.g., Chetty, Looney, and Kroft (2009), Goldin (2015), and Taubinsky and Rees-Jones (2017)), can affect households' consumption and financial decisions as well as asset prices (Bordalo, Gennaioli, and Shleifer (2012), Bordalo, Gennaioli, and Shleifer (2013), and Birru, Chague, De-Losso, and Giovannetti (2019)). In addition, prevailing tax policies confer economic incentives that should affect portfolio decisions.…”