In finance, there’s a simple assumption that money is money. A dollar is a dollar, no matter where it comes from.
But a forthcoming study in the Journal of Financial and Quantitative Analysis by Xindi He, assistant professor of finance at the Scheller College of Business, and his co-author Ning Zhu, professor at the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University, suggests that individual investors don’t always treat money as fungible when making decisions in their brokerage accounts.
Their findings complicate that assumption.
He and Zhu’s research shows that investors often treat money differently depending on where it comes from. A dollar transferred from a savings account does not feel the same as a dollar generated by selling a stock, even when both sit side by side as cash in the same brokerage account.
The Idea of “Cash Temperature”
To capture that difference, He introduced the idea of “cash temperature.”
“I would describe cash temperature as a way to measure how money feels to an investor based on its recent history,” He said. “‘Cold’ cash is money that recently came from a stable source, such as a savings account. ‘Hot’ cash is money generated by selling stocks or other risky assets.”
That distinction might sound subtle, but in practice, it shapes how people invest. As He and his co-author analyzed detailed brokerage data, a clear and surprising pattern emerged.
“What struck us was how systematic the pattern was,” He said. “This was not just about one measure of risk.”
Across nine dimensions, investors using colder cash behaved more cautiously. They chose less volatile stocks, stocks with weaker recent run-ups and lower attention measures, and stocks more likely to be part of major market indexes. They also held these positions longer, and the stocks had better subsequent performance.
“The consistency across these dimensions made the pattern much more compelling,” He said.
By contrast, when investors used hotter cash, money that had already been exposed to market risk, they were more willing to take chances. They pursued riskier stocks, often without better returns to show for it.
“The evidence points to harm, especially when investors treat hot cash as easier to risk,” He said. “In our data, hotter cash leads investors to buy riskier stocks, and those purchases are followed by lower subsequent returns. Investors take more risk but do not appear to be rewarded for it.”
Meaning Behind the Money
At the heart of this behavior is something deeply intuitive. People assign meaning to their money.
“A dollar from savings may feel like protected wealth, while a dollar from selling a stock may feel like money already set aside for investing,” He said.
In a pre-registered experiment, that feeling showed up in how people experienced loss. Participants reported that a hypothetical loss felt more painful when the money was framed as coming from a savings account than when it was framed as coming from a brokerage account.
“That suggests that the source of money changes how investors experience potential losses,” He said.
The effect plays out in everyday decisions. Someone who transfers $5,000 from savings into an investment account may tread carefully, treating it as something to preserve. But that same person might take bigger risks with money that came from a recent stock sale, seeing it as already “in the market.”
The study also finds that these mental labels are not fixed.
“We were also surprised by how dynamic the effect was,” he said. “Cash labels were not fixed forever. They were refreshed as money moved through the brokerage account and faded over time when there was no salient account activity.”
What Investors Can Learn
For investors, the takeaway is simple but powerful. Before deciding, pause and strip away the story attached to the money.
“The practical lesson is to pay attention to the mental labels attached to cash,” He said. “Ask yourself, ‘Would I still make this purchase if I ignored where the cash came from and evaluated the stock on its own merits?’”
While money may be identical on paper, it does not always feel that way in practice. Its source can shape the stocks investors choose and the returns that follow.
Read More: “Portfolio Choice with Non-Fungible Brokerage Cash”