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Loss-Averse Preferences, Performance, and Career Success of Institutional Investors

Author

Listed:
  • Andriy Bodnaruk
  • Andrei Simonov

Abstract

Using survey-based measures of mutual fund manager loss aversion, we study the effects of institutional investor preferences on their investment decisions, performance, and career outcomes. We find that managers with higher aversion to losses choose portfolios with lower downside risk, increase their risk-taking more in response to poor past performance, and display a stronger disposition effect. Further, we provide evidence that managers who are more loss-averse have lower performance and are more likely to have their contracts terminated.Received December 3, 2014; editorial decision May 25, 2016 by Editor Andrew Karolyi.

Suggested Citation

  • Andriy Bodnaruk & Andrei Simonov, 2016. "Loss-Averse Preferences, Performance, and Career Success of Institutional Investors," The Review of Financial Studies, Society for Financial Studies, vol. 29(11), pages 3140-3176.
    • Handle: RePEc:oup:rfinst:v:29:y:2016:i:11:p:3140-3176.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhw053
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    Cited by:

    1. Jens Hagendorff & Sonya Lim & Duc Duy Nguyen, 2023. "Lender Trust and Bank Loan Contracts," Management Science, INFORMS, vol. 69(3), pages 1758-1779, March.
    2. Wu, Qinqin & Chou, Robin K. & Lu, Jing, 2020. "How does air pollution-induced fund-manager mood affect stock markets in China?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 28(C).
    3. Michail Anthropelos & Tianran Geng & Thaleia Zariphopoulou, 2020. "Competition in Fund Management and Forward Relative Performance Criteria," Papers 2011.00838, arXiv.org.
    4. Restrepo, Hector & Zhang, Weiyi & Mei, Bin, 2020. "The time-varying role of timberland in long-term, mixed-asset portfolios under the mean conditional value-at-risk framework," Forest Policy and Economics, Elsevier, vol. 113(C).
    5. Zhang, Ning & Zhang, Yue & Zong, Zhe, 2023. "Fund ESG performance and downside risk: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 86(C).
    6. Mai, Nhat Chi, 2020. "Behaviours In The Stock Market - An Empirical Study," OSF Preprints ypq8m, Center for Open Science.
    7. Min Maung & Zhenyang Tang & Xiaowei Xu, 2020. "Religion and venture investing: A cross‐country analysis," The Financial Review, Eastern Finance Association, vol. 55(3), pages 433-460, August.
    8. Susanne Berger & Herbert Stocker & Achim Zeileis, 2017. "Innovation and institutional ownership revisited: an empirical investigation with count data models," Empirical Economics, Springer, vol. 52(4), pages 1675-1688, June.
    9. Lai, Chong, 2022. "Investment dynamics of fund managers under evolutionary games," International Review of Financial Analysis, Elsevier, vol. 82(C).
    10. DeVault, Luke & Sias, Richard, 2017. "Hedge fund politics and portfolios," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 80-97.
    11. Pedersen, Michael, 2019. "Anomalies in macroeconomic prediction errors–evidence from Chilean private forecasters," International Journal of Forecasting, Elsevier, vol. 35(3), pages 1100-1107.
    12. Adam Farago & Martin Holmén & Felix Holzmeister & Michael Kirchler & Michael Razen, 2022. "Cognitive Skills and Economic Preferences in the Fund Industry," The Economic Journal, Royal Economic Society, vol. 132(645), pages 1737-1764.
    13. Gu Wang & Jiaxuan Ye, 2023. "Fund Managers’ Competition for Investment Flows Based on Relative Performance," Journal of Optimization Theory and Applications, Springer, vol. 198(2), pages 605-643, August.
    14. Chakravarty, Sugato & Ray, Rina, 2020. "On short-term institutional trading skill, behavioral biases, and liquidity need," Journal of Corporate Finance, Elsevier, vol. 65(C).
    15. Sri Utami Ady, 2018. "The Cognitive and Psychological Bias in Investment Decision-Making Behavior: (Evidence From Indonesian Investor's Behavior)," Journal of Economics and Behavioral Studies, AMH International, vol. 10(1), pages 86-100.
    16. Caglayan, Mustafa O. & Lawrence, Edward & Reyes-Peña, Robinson, 2023. "Hot potatoes: Underpricing of stocks following extreme negative returns," Journal of Banking & Finance, Elsevier, vol. 149(C).
    17. Niu, Weining & Zeng, Qingduo, 2018. "Corporate financing with loss aversion and disagreement," Finance Research Letters, Elsevier, vol. 27(C), pages 80-90.
    18. Antonio M. Espin & Francisco Reyes-Pereira & Luis F. Ciria, 2017. "Organizations should know their people: A behavioral economics approach," Journal of Behavioral Economics for Policy, Society for the Advancement of Behavioral Economics (SABE), vol. 1(S), pages 41-48, November.
    19. Farago, Adam & Holmén, Martin & Holzmeister, Felix & Kirchler, Michael & Razen, Michael, 2019. "Cognitive Skills and Economic Preferences in the Fund Industry," OSF Preprints 964ba, Center for Open Science.

    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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