Abstract
Empirically, mutual fund flows depend on past performance. It is unclear, however, whether this is rational. Using experiments, we overcome measurement problems of real data. We detect two anomalies: (1) "absolute performance effect"-investors' tendency to delegate money to a fund increases with performance, even when performance is uninformative; (2) "relative performance effect"-investors' tendency to delegate money decreases with other funds' performance, even when their performance is attributed to luck per se. We suggest two descriptive alternatives to expected utility: (1) "subjective conditional probability"-subjective probabilities deviate from Bayesian posteriors; (2) "subjective risk aversion"-a history-dependent utility function.
| Original language | English |
|---|---|
| Pages (from-to) | 341-363 |
| Number of pages | 23 |
| Journal | Journal of Economic Behavior and Organization |
| Volume | 52 |
| Issue number | 3 |
| DOIs | |
| State | Published - 1 Jan 2003 |
Bibliographical note
Funding Information:We would like to thank Werner Güth, Gur Huberman, Ariel Rubinstein and particularly, Uri Gneezy. We also thank participants of the Economic Science Association Meeting in Grenoble, France, and of the Economic Theory Seminar at Tel-Aviv University. Comments by an anonymous referee are much appreciated. Sonsino thanks the Fund for the Promotion of Research at the Technion for financial support.
Keywords
- Absolute performance
- Relative performance
- Subjective conditional probability
- Subjective risk aversion
ASJC Scopus subject areas
- Economics and Econometrics
- Organizational Behavior and Human Resource Management