Intrinsic and extrinsic effects on behavioral tax biases in risky investment decisions

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractIn a variety of recent papers, it is shown that individuals do not take taxes correctly into account, which results in distorted or unexpected investment behavior. We shed further light on the discussion of such behavioral tax perception biases by analyzing intrinsic and extrinsic effects on decision behavior. We study two dimensions: (1) the influence of emotions and cognition (individual dimension, intrinsic effects) and (2) the influence of available tax information by varying tax complexity and salience (tax system dimension, extrinsic effects). In our laboratory experiment, we construct the payoff structure such that the subjects are confronted with exactly the same choices in net terms in a situation with or without a capital gains tax. This design allows us to identify pure tax perception biases. We show that both dimensions are able to explain tax perception biases. In particular, we find evidence that perceived risk (cognition) is lower and consequently willingness to take risk is higher with a capital gains tax (with full loss offset provision) than without taxation. Furthermore, this positive effect on risky investment is higher in a situation with a rather low level of tax information in which tax complexity is high and tax salience is low. In addition, we are able to provide evidence that the use of decision heuristics can explain the observed tax bias differences between our information treatments. In particular, we find a negative relationship between the information level and the use of heuristics.

Do investors exhibit behavioral biases in investment decision making? A systematic review

“…Hassan and Bashir (2014) used it to check the stationarity of the secondary data before applying any other test. Mann-Whitney test is also used by Fellner and Maciejovsky (2003), Fernandes and Luiz (2007), Feldman and Lepori (2016), Fochmann et al (2016), and Feldman and Lepori (2016. Fellner and Sutter (2009) used this test to find the differences in the return properties of irrationality aggregating and rational investors.…”

“…The further extension can be made by including additional biases like disposition effect, home bias, financial education, current income levels and the status of the business cycle of the country in the study. Fochmann et al (2016) conducted an experiment to test the effect of tax perception biases of the investors. The participants were asked to choose regimes when they were given an option of investment with the tax imposed on capital gains and the other with no tax imposed on capital gains.…”

Tax Misperception and its Effects on Decision Making – Literature Review and Behavioral Taxpayer Response Model

“…However, opposite results are observed with respect to tax loss-offsets. Subjects that decide between net-equivalent risky lotteries seem to overestimate the risk reduction effect of tax loss-offsets, so that taxes could also increase risk appetite in cases involving a higher probability of loss (Fochmann et al, 2012a(Fochmann et al, , 2012bFochmann et al, 2016).…”

“…They determine tax effects biased by risk and loss aversion for different loss offset restrictions. Fochmann et al (2016) and Fochmann et al (2017) experimentally examine the effect of emotions on risk-taking. Fochmann et al (2016) show that the more pleasant and less exciting a tax treatment is perceived to be, the greater the risky investment.…”

“…Fochmann et al (2016) and Fochmann et al (2017) experimentally examine the effect of emotions on risk-taking. Fochmann et al (2016) show that the more pleasant and less exciting a tax treatment is perceived to be, the greater the risky investment. Fochmann et al (2017) provide evidence that investors do not change their risk-taking behavior as a direct consequence of changing tax rules, yet do in response to the affective perception of these different tax rules.…”