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Extrapolation and Rational Inattention: Evidence from Chinese Mutual Funds

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  • Guarino, Antonio
  • Wang, Gang
  • Yu, Yang

Abstract

We examine the role of extrapolative beliefs in professional investors’ decision-making using a novel dataset of Chinese mutual fund managers. By applying textual analysis to semiannual reports, we quantify market expectations and link them to portfolio choices. We find that fund managers systematically extrapolate past returns, which hinders market timing but enhances stock picking. These effects offset, leaving overall performance unaffected. Extrapolation increases during economic expansions, when idiosyncratic risk is relatively more important. Our results align with the theory of rational inattention, suggesting that extrapolation is a resource-efficient strategy.

Suggested Citation

  • Guarino, Antonio & Wang, Gang & Yu, Yang, 2025. "Extrapolation and Rational Inattention: Evidence from Chinese Mutual Funds," CEPR Discussion Papers 20533, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:20533
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    File URL: https://cepr.org/publications/DP20533
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    Keywords

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    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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