On Absolute and Relative Performance and the Demand for Mutual Funds - Experimental Evidence

45 Pages Posted: 22 Mar 2000

See all articles by Doron Kliger

Doron Kliger

University of Haifa

Doron Sonsino

Technion-Israel Institute of Technology - The William Davidson Faculty of Industrial Engineering & Management

Date Written: December 21, 1999

Abstract

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

Kliger, Doron and Sonsino, Doron, On Absolute and Relative Performance and the Demand for Mutual Funds - Experimental Evidence (December 21, 1999). Available at SSRN: https://ssrn.com/abstract=201848 or http://dx.doi.org/10.2139/ssrn.201848

Doron Kliger (Contact Author)

University of Haifa ( email )

Haifa 31905
Israel
(972)4-8249587 (Phone)
(972)4-8240059 (Fax)

Doron Sonsino

Technion-Israel Institute of Technology - The William Davidson Faculty of Industrial Engineering & Management ( email )

Haifa 32000
Israel
(972) 4-8294435 (Phone)

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