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Prospect theory preferences and global mutual fund flows

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  • Gupta, Nilesh
  • Mishra, Anil V
  • Jacob, Joshy

Abstract

We examine the influence of Cumulative Prospect Theory (CPT) characteristics of fund returns on investment flows with a cross-country data of equity mutual funds. We find that a larger CPT value of the style-adjusted past returns is associated with higher fund flows in the subsequent quarter. The impact is greater for retail-oriented funds, relatively younger funds, and those with higher active share. While funds that score high on the CPT value attract incremental fund flows, they earn a lower alpha than their peers in the following year. The sensitivity of fund flows to the CPT characteristics is higher in countries with greater individualism and short-term orientation. The results are robust to several additional tests and hold across various subsamples of our data. The findings imply that investors have misplaced expectations about the future performance of funds that show higher CPT values and the fund managers cater to these investor preferences.

Suggested Citation

  • Gupta, Nilesh & Mishra, Anil V & Jacob, Joshy, 2022. "Prospect theory preferences and global mutual fund flows," Journal of International Money and Finance, Elsevier, vol. 125(C).
    • Handle: RePEc:eee:jimfin:v:125:y:2022:i:c:s0261560622000432
    DOI: 10.1016/j.jimonfin.2022.102640
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    More about this item

    Keywords

    Fund flows; mutual funds; Cumulative Prospect Theory; biases;
    All these keywords.

    JEL classification:

    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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