We document that individuals consume up to 25% of what-we-call “fictitious” capital gains and that they are selectively inattentive to their actual capital gains. We exploit a natural experiment that changed the displayed purchase prices and capital gains of mutual funds in individuals’ portfolios. Individuals choose to sell and consume “fictitious winners,” i.e., a mutual fund is shown to have a positive capital gain under the newly displayed purchase price even though it is subject to a capital loss under the actual purchase price. In contrast, individuals seem to notice and do not respond to fictitious losers. In principle, individuals are informed about their actual capital gains, but our effects are stronger when the supplied information is less salient. Our findings suggest that selective inattention and salience in financial markets have real consequences in terms of affecting consumption. Additionally, this marginal propensity to consume out of (selectively confused) capital gains is informative about the literature on consumption out of stock market wealth.
Friday, November 27, 2020, 1:30 pm – 2:45 pm