On Absolute and Relative Performance and the Demand for Mutual Funds - Experimental Evidence
45 Pages Posted: 22 Mar 2000
Date Written: December 21, 1999
Empirically, mutual fund flows depend on past performance. It is unclear, however, whether this behavior is rational. Using the experimental approach we analyze behavior without confronting measurement problems of real data. We detect two anomalies: "Absolute Performance Effect" -- investors' tendency to delegate money to a fund increases with performance, even when performance is uninformative; and "Relative Performance Effect" -- investors' tendency to delegate money to the fund decreases with the performance of other funds, even when their performance attributed to luck per-se. We suggest two alternatives to expected utility: "Subjective Conditional Probability" -- the probabilities assigned by investors to future events differ from the Bayesian posterior; and "Subjective Risk Aversion" -- the utility function is history dependent.
JEL Classification: C91, D81, G11
Suggested Citation: Suggested Citation