The mutual funds puzzle and the elusive von Neumann-Morgenstern preference relation

Doron Nisani, Amit Shelef, Ralph Sonenshine, Or David

Research output: Contribution to journalArticlepeer-review


This research studies the Mutual Funds Puzzle from the viewpoint of an economic agent that satisfies the von Neumann-Morgenstern preference relation. We postulate that the probability of a fund manager to outperform the market decreases in a growing market. To examine this supposition, we prove that a risk-averse investor's behavior is consistent with the binary econometric model and develop a ranking methodology for mutual funds' performances. We find supporting evidence for our conjecture in examining the Israeli capital market during 1/1/2009–3/13/2022. Subsequently, we conclude that investors regard mutual funds as hedging instruments for countering unexpected events rather than investment instruments.

Original languageEnglish
Article number103099
JournalInternational Review of Financial Analysis
StatePublished - Mar 2024
Externally publishedYes

Bibliographical note

Publisher Copyright:
© 2024 Elsevier Inc.


  • Mutual funds puzzle
  • Performance measurement
  • Stochastic dominance rules
  • von Neumann-Morgenstern model

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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