Advanced Search
MyIDEAS: Login to save this paper or follow this series

Behavioral Biases of Mutual Fund Investors

Contents:

Author Info

  • Bailey, Warren

    (Cornell University)

  • Kumar, Alok

    (Miami University and University of TX)

  • Ng, David

    (University of PA and Cornell University)

Registered author(s):

    Abstract

    We examine the effect of behavioral biases on the mutual fund choices of a large sample of U.S. discount brokerage investors using new measures of attention to news, tax awareness, and fund-level familiarity bias, in addition to behavioral and demographic characteristics of earlier studies. Behaviorally-biased investors typically make poor decisions about fund style and expenses, trading frequency, and timing, resulting in poor performance. Furthermore, trend-chasing appears related to behavioral biases, rather than to rationally inferring managerial skill from past performance. Beyond documenting the importance of behavioral factors in the delegated management setting of mutual funds, applying factor analysis to the individual behavioral bias measures and other characteristics identifies several investor stereotypes that we relate to mutual fund trading and performance.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://fic.wharton.upenn.edu/fic/papers/10/10-23.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by University of Pennsylvania, Wharton School, Weiss Center in its series Working Papers with number 10-23.

    as in new window
    Length:
    Date of creation: Jul 2010
    Date of revision:
    Handle: RePEc:ecl:upafin:10-23

    Contact details of provider:
    Postal: 3404 Steinberg Hall-Dietrich Hall, 3620 Locust Walk, Philadelphia, PA 19104-6367
    Phone: (215)898-7626
    Fax: (215)573-2242
    Email:
    Web page: http://finance.wharton.upenn.edu/weiss/papers.html
    More information through EDIRC

    Related research

    Keywords:

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Shlomo Benartzi & Richard Thaler, 2007. "Heuristics and Biases in Retirement Savings Behavior," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 81-104, Summer.
    2. Todd Mitton & Keith Vorkink, 2007. "Equilibrium Underdiversification and the Preference for Skewness," Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1255-1288.
    3. Zoran Ivkovich & James Poterba & Scott Weisbenner, 2004. "Tax-Motivated Trading by Individual Investors," NBER Working Papers 10275, National Bureau of Economic Research, Inc.
    4. Huberman, Gur, 2001. "Familiarity Breeds Investment," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 659-80.
    5. Alok Kumar & William N. Goetzmann, 2001. "Equity Portfolio Diversification," Yale School of Management Working Papers ysm236, Yale School of Management.
    6. Coval, Joshua & Stafford, Erik, 2007. "Asset fire sales (and purchases) in equity markets," Journal of Financial Economics, Elsevier, vol. 86(2), pages 479-512, November.
    7. Merton, Robert C, 1987. " A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, vol. 42(3), pages 483-510, July.
    8. Shefrin, Hersh & Statman, Meir, 2000. "Behavioral Portfolio Theory," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(02), pages 127-151, June.
    9. Brad M. Barber & Terrance Odean & Lu Zheng, 2005. "Out of Sight, Out of Mind: The Effects of Expenses on Mutual Fund Flows," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2095-2120, November.
    10. Javier Gil-Bazo & Pablo Ruiz-Verd�, 2009. "The Relation between Price and Performance in the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 64(5), pages 2153-2183, October.
    11. Brad M. Barber & Terrance Odean, 2008. "All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors," Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 785-818, April.
    12. Brad M. Barber & Terrance Odean, 2001. "Boys Will Be Boys: Gender, Overconfidence, And Common Stock Investment," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 261-292, February.
    13. John Y. Campbell, 2006. "Household Finance," Journal of Finance, American Finance Association, vol. 61(4), pages 1553-1604, 08.
    14. Susan E. K. Christoffersen & David K. Musto, 2002. "Demand Curves and the Pricing of Money Management," Review of Financial Studies, Society for Financial Studies, vol. 15(5), pages 1499-1524.
    15. Daniel Bergstresser & John M. R. Chalmers & Peter Tufano, 2009. "Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry," Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4129-4156, October.
    16. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
    17. John R. Graham & Alok Kumar, 2006. "Do Dividend Clienteles Exist? Evidence on Dividend Preferences of Retail Investors," Journal of Finance, American Finance Association, vol. 61(3), pages 1305-1336, 06.
    18. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
    19. Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, 04.
    20. Nicholas Barberis & Ming Huang, 2008. "Stocks as Lotteries: The Implications of Probability Weighting for Security Prices," American Economic Review, American Economic Association, vol. 98(5), pages 2066-2100, December.
    21. Shefrin, Hersh & Statman, Meir, 1985. " The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 777-90, July.
    22. Kenneth R. French, 2008. "Presidential Address: The Cost of Active Investing," Journal of Finance, American Finance Association, vol. 63(4), pages 1537-1573, 08.
    23. Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December.
    24. 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.
    25. Zoran Ivkovic & Scott Weisbenner, 2005. "Local Does as Local Is: Information Content of the Geography of Individual Investors' Common Stock Investments," Journal of Finance, American Finance Association, vol. 60(1), pages 267-306, 02.
    26. Aneel Keswani & David Stolin, 2008. "Which Money Is Smart? Mutual Fund Buys and Sells of Individual and Institutional Investors," Journal of Finance, American Finance Association, vol. 63(1), pages 85-118, 02.
    27. Christoffersen, Susan E.K. & Sarkissian, Sergei, 2009. "City size and fund performance," Journal of Financial Economics, Elsevier, vol. 92(2), pages 252-275, May.
    28. Jonathan B. Berk & Richard C. Green, 2002. "Mutual Fund Flows and Performance in Rational Markets," FAME Research Paper Series rp100, International Center for Financial Asset Management and Engineering.
    29. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    30. Ivković, Zoran & Sialm, Clemens & Weisbenner, Scott, 2008. "Portfolio Concentration and the Performance of Individual Investors," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(03), pages 613-655, September.
    31. Frazzini, Andrea & Lamont, Owen A., 2008. "Dumb money: Mutual fund flows and the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 88(2), pages 299-322, May.
    32. Joshua D. Coval & Tobias J. Moskowitz, 1999. "Home Bias at Home: Local Equity Preference in Domestic Portfolios," Journal of Finance, American Finance Association, vol. 54(6), pages 2045-2073, December.
    33. Alok Kumar, 2009. "Who Gambles in the Stock Market?," Journal of Finance, American Finance Association, vol. 64(4), pages 1889-1933, 08.
    34. Alok Kumar & Charles M.C. Lee, 2006. "Retail Investor Sentiment and Return Comovements," Journal of Finance, American Finance Association, vol. 61(5), pages 2451-2486, October.
    35. Alok Kumar & Sonya Seongyeon Lim, 2008. "How Do Decision Frames Influence the Stock Investment Choices of Individual Investors?," Management Science, INFORMS, vol. 54(6), pages 1052-1064, June.
    36. Jennifer Huang & Kelsey D. Wei & Hong Yan, 2007. "Participation Costs and the Sensitivity of Fund Flows to Past Performance," Journal of Finance, American Finance Association, vol. 62(3), pages 1273-1311, 06.
    37. Arthur B. Kennickell & Martha Starr-McCluer, 1994. "Changes in family finances from 1989 to 1992: evidence from the Survey of Consumer Finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 861-882.
    38. Lu Zheng, 1999. "Is Money Smart? A Study of Mutual Fund Investors' Fund Selection Ability," Journal of Finance, American Finance Association, vol. 54(3), pages 901-933, 06.
    39. Mark Grinblatt, 2001. "How Distance, Language, and Culture Influence Stockholdings and Trades," Journal of Finance, American Finance Association, vol. 56(3), pages 1053-1073, 06.
    40. Edwin J. Elton & Martin J. Gruber & Jeffrey A. Busse, 2004. "Are Investors Rational? Choices among Index Funds," Journal of Finance, American Finance Association, vol. 59(1), pages 261-288, 02.
    41. Ivkovic, Zoran & Weisbenner, Scott, 2009. "Individual investor mutual fund flows," Journal of Financial Economics, Elsevier, vol. 92(2), pages 223-237, May.
    42. Daniel Kahneman & Dan Lovallo, 1993. "Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking," Management Science, INFORMS, vol. 39(1), pages 17-31, January.
    43. Sensoy, Berk A., 2009. "Performance evaluation and self-designated benchmark indexes in the mutual fund industry," Journal of Financial Economics, Elsevier, vol. 92(1), pages 25-39, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Navone, Marco, 2012. "Investors’ distraction and strategic repricing decisions," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1291-1303.
    2. Navone, Marco, 2012. "Reprint of Investors’ distraction and strategic repricing decisions," Journal of Banking & Finance, Elsevier, vol. 36(10), pages 2729-2741.
    3. Hamberg, Mattias & Mavruk, Taylan & Sjögren, Stefan, 2013. "Investment allocation decisions, home bias and the mandatory IFRS adoption," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 107-130.
    4. Philipp Stephan & Rüdiger Nitzsch, 2013. "Do individual investors’ stock recommendations in online communities contain investment value?," Financial Markets and Portfolio Management, Springer, vol. 27(2), pages 149-186, June.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:ecl:upafin:10-23. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.