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Behavioral Biases of Mutual Fund Investors

Author

Listed:
  • Bailey, Warren

    (Cornell University)

  • Kumar, Alok

    (Miami University and University of TX)

  • Ng, David

    (University of PA and Cornell University)

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.

Suggested Citation

  • Bailey, Warren & Kumar, Alok & Ng, David, 2010. "Behavioral Biases of Mutual Fund Investors," Working Papers 10-23, University of Pennsylvania, Wharton School, Weiss Center.
  • Handle: RePEc:ecl:upafin:10-23
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    File URL: https://www.sciencedirect.com/science/article/pii/S0304405X11001140
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    References listed on IDEAS

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    Cited by:

    1. Philipp Stephan & Rüdiger Nitzsch, 2013. "Do individual investors’ stock recommendations in online communities contain investment value?," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 27(2), pages 149-186, June.
    2. Navone, Marco, 2012. "Investors’ distraction and strategic repricing decisions," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1291-1303.
    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. Navone, Marco, 2012. "Reprint of Investors’ distraction and strategic repricing decisions," Journal of Banking & Finance, Elsevier, vol. 36(10), pages 2729-2741.

    More about this item

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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