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Style matters: investment performance presentation effects on investor preferences

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  • Eric Terry
  • Bettina West
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    Abstract

    This study examines the influence of investment fund performance presentation format on investor decisions. We perform an experiment in which participants are shown past performance information about two funds one with superior short-term results and the other with better long-term results and asked to choose their preferred option. Results indicate the fund with superior short-term results is chosen more often when short-term performance appears last and the fund with superior long-term performance is chosen more frequently when long-term performance is presented last. This recency effect, in which individuals over-emphasise the last piece of performance data presented to them, is insensitive to simulated market conditions, and disappears entirely when performance results are displayed vertically rather than horizontally. Implications for investors, fund managers and policy makers are discussed.

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    Bibliographic Info

    Article provided by Inderscience Enterprises Ltd in its journal Global Business and Economics Review.

    Volume (Year): 14 (2012)
    Issue (Month): 1/2 ()
    Pages: 102-114

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    Handle: RePEc:ids:gbusec:v:14:y:2012:i:1/2:p:102-114

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    Web page: http://www.inderscience.com/browse/index.php?journalID=168

    Related research

    Keywords: behavioural finance; performance reporting; recency effects; serial order effects; information presentation; investment performance; investor preferences; investment funds.;

    References

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    1. De Bondt, Werner F M & Thaler, Richard H, 1987. " Further Evidence on Investor Overreaction and Stock Market Seasonalit y," Journal of Finance, American Finance Association, vol. 42(3), pages 557-81, July.
    2. Diacon, Stephen & Hasseldine, John, 2007. "Framing effects and risk perception: The effect of prior performance presentation format on investment fund choice," Journal of Economic Psychology, Elsevier, vol. 28(1), pages 31-52, January.
    3. Prem C. Jain & Joanna Shuang Wu, 2000. "Truth in Mutual Fund Advertising: Evidence on Future Performance and Fund Flows," Journal of Finance, American Finance Association, vol. 55(2), pages 937-958, 04.
    4. Chevalier, J. & Ellison, G., 1996. "Risk Taking by Mutual Funds as a Response to Incentives," Working papers 96-3, Massachusetts Institute of Technology (MIT), Department of Economics.
    5. Erik R. Sirri & Peter Tufano, 1998. "Costly Search and Mutual Fund Flows," Journal of Finance, American Finance Association, vol. 53(5), pages 1589-1622, October.
    6. Rik Pieters & Michel Wedel & Jie Zhang, 2007. "Optimal Feature Advertising Design Under Competitive Clutter," Management Science, INFORMS, vol. 53(11), pages 1815-1828, November.
    7. Travis Sapp & Ashish Tiwari, 2004. "Does Stock Return Momentum Explain the "Smart Money" Effect?," Journal of Finance, American Finance Association, vol. 59(6), pages 2605-2622, December.
    8. Brown, Stephen J & Goetzmann, William N, 1995. " Performance Persistence," Journal of Finance, American Finance Association, vol. 50(2), pages 679-98, June.
    9. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    10. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
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