Transparency and Investment Decisions: Evidence from the Disposition Effect

The wealth-diminishing tendency of investors to forgo loss realization in favor of gain realization, known as the disposition effect, is considerably lower in a transparent trading environment. Using proprietary data from a social trading platform, we analyze individual trades as portfolios become publicly visible in multiple stages. Findings show that the disposition effect diminishes about 35% when trades and holdings are unhidden, and this is robust to alternative explanations. Inter alia, we identify the impact of ‘transparency culture’ on trading behavior through differences between the former West and East Germany in light of the latter’s historical exposure to state surveillance.