By using a unique proprietary dataset and implementing the Wuhan (China) lockdown from January to April 2020 as a natural experiment, we find that individual mutual fund investors in Wuhan significantly reduced their trading frequency, total investment of their portfolios, and risk level of their invested funds during the lockdown period as compared to investors in other cities. These changes are stronger for older investors and are reversed soon after the lifting of the lockdown. Our results suggest that the elimination of face-to-face interaction among individual investors reduced their information sharing, which led to more conservatism in their financial trading. These results are not supported by the alternative explanations of limited investor attention and temporary changes in personal circumstances, including depression and/or income reduction, during the lockdown period. Finally, consistent with the theory of naïve investor trading, we also find that investors received higher trading returns during the lockdown.

Using four datasets of individuals’ digital payment and mutual fund investment records from a dominating fintech platform, we observe a robust U-shaped relation between individuals’ consumption and their financial wealth shocks. Contrary to the prediction of the wealth effect, individuals increase their consumption shortly after experiencing large positive and negative wealth shocks. The unexpected increase in consumption following negative wealth shocks is particularly pronounced among consumption categories with a “hedonic” nature, such as entertainment-related items. We show that this effect, termed “financial retail therapy,” is consistent with a dynamic model of Prospect Theory and evidence from a controlled laboratory experiment.

We examine whether investor behavior can be influenced by the social norms to which they are exposed. Specifically, we test two competing hypotheses regarding the influence of social trust on the disposition effect related to mutual fund investment. On the one hand, a higher level of social trust may elicit stronger investor reactions by increasing the credibility of the performance numbers reported by funds. This results in higher flow-performance sensitivity, which mitigates investors’ tendency to sell winners and hold onto losers. On the other hand, societal trust may reduce concerns about expropriation, thereby weakening investors’ need to react to poor performance. The resulting lower flow-performance sensitivity increases the disposition effect. Based on a proprietary dataset of complete account-level trading information for all investors in a large mutual fund family in China, we find compelling evidence 1) of a significant disposition effect among fund investors; 2) that a higher degree of social trust is associated with higher flow-performance sensitivity; and 3) that (high) trust-induced flows mitigate the disposition effect. Our results suggest that, in addition to cognitive biases, investor behavior is also strongly influenced by social norms.