Investment Decisions Under Ambiguity: Evidence from Mutual Fund Investor Behavior

Forthcoming in Management Science

46 Pages Posted: 27 Sep 2013 Last revised: 5 Sep 2016

See all articles by C. Wei Li

C. Wei Li

University of Iowa

Ashish Tiwari

University of Iowa

Lin Tong

Fordham University - Finance Area

Date Written: December 22, 2015

Abstract

We provide novel evidence on the role of ambiguity aversion in determining the response of mutual fund investors to fund performance. Our analysis is motivated by theoretical models of decision making by ambiguity-averse investors. A key implication of the models is that when investors face information signals of uncertain quality, they place a greater weight on the worst signal. We find strong empirical support for this prediction in the form of heightened sensitivity of investor fund flows to the worst performance measure across multiple horizons. This effect is particularly pronounced for retail funds in contrast to institutional funds.

Keywords: Ambiguity aversion, Mutual fund performance, Investor behavior, Bayesian learning, Flow-performance sensitivity

Suggested Citation

Li, C. Wei and Tiwari, Ashish and Tong, Lin, Investment Decisions Under Ambiguity: Evidence from Mutual Fund Investor Behavior (December 22, 2015). Forthcoming in Management Science, Available at SSRN: https://ssrn.com/abstract=2331486 or http://dx.doi.org/10.2139/ssrn.2331486

C. Wei Li

University of Iowa ( email )

Finance Department
Henry B. Tippie College of Business
Iowa City, IA 52242-1097
United States
319-335-0911 (Phone)
3193353690 (Fax)

Ashish Tiwari

University of Iowa ( email )

Finance Department
Henry B. Tippie College of Business, 108 PBB
Iowa City, IA 52242
United States
(319) 353-2185 (Phone)
(319) 335-3690 (Fax)

HOME PAGE: https://tippie.uiowa.edu/people/ashish-tiwari

Lin Tong (Contact Author)

Fordham University - Finance Area ( email )

33 West 60th Street
New York, NY 10023
United States

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