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Cognitive Skills and Economic Preferences in the Fund Industry

Author

Listed:
  • Adam Farago
  • Martin Holmén
  • Felix Holzmeister
  • Michael Kirchler
  • Michael Razen

Abstract

We investigate the impact of cognitive skills and economic preferences on fund managers' professional decisions by running a battery of experiments with them. First, we find that fund managers’ risk tolerance positively correlates with fund risk when accounting for fund benchmark, fund category and other controls. Second, we show that fund managers’ ambiguity tolerance positively correlates with the funds’ tracking error from the benchmark. Finally, we report that cognitive skills do not explain fund performance in terms of excess returns. However, we do find that fund managers with high cognitive reflection abilities compose funds at lower risk.

Suggested Citation

  • 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.
    • Handle: RePEc:oup:econjl:v:132:y:2022:i:645:p:1737-1764.
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