Consumption out of Fictitious Capital Gains and Selective Inattention

Do retail investors’ behavioral biases in trading directly affect their consumption out of stock market wealth? We exploit a natural experiment that changed the displayed purchase prices in investors’ online portfolios. Investors are more likely to sell and consume on average 25% of “fictitious” capital gains, i.e., displayed capital gains under the new purchase prices that are capital losses under the actual purchase prices. We argue that investors are selectively inattentive: they are more responsive when fictitious gains are larger and actual losses are smaller, they notice fictitious losses, and they react even when actual purchase prices are very salient.