Too familiar to perceive: How does extreme air quality affect investors' disposition effect?

This study investigates the impact of air quality on investor decision-making and the mechanisms underlying this relationship. Using a distinctive investor-level dataset that we construct by integrating individual trading records, investor sentiment and air quality, we document a U-shaped relationship between air quality and the investor disposition effect, with the inflection point occurring under severe air pollution. This pattern is driven by a U-shaped relationship between air quality and investors’ propensity to realize gains. Both good and poor air quality have negative effects on investors’ selling decisions, and the effect under heavy or severe air pollution is about twelve times stronger than that under good air quality. Furthermore, this study highlights the role of investor sentiment as a mechanism. Air pollution, particularly severe pollution, leads to investors’ pessimistic sentiment and increased propensity to realize losses, thereby exacerbating the disposition effect.