Prospect Theory and Mutual Fund Flows

Ariel Gu () and Hong Il Yoo

Economics Letters, 2021, vol. 201, issue C

Abstract: We evaluate the hypothesis that investors seek portfolios that display attractive return distributions in terms of Prospect Theory (PT). We consider the mutual fund market in the U.S. as an interesting testbed because fund investors are known to be return-chasing and about a half of U.S. households own mutual funds. Using monthly flow data from 1999–2019, we find that mutual funds attract higher net flows when they have better PT values. We obtain similar results when PT is replaced with Rank-Dependent Utility, a closely related theory that does not require a particular choice of reference points. Our results are consistent with recent evidence that fund flows exhibit heightened sensitivity to extreme performance measures.

Keywords: Prospect theory; Mutual fund; Portfolio choice; Behavioral finance; Non-expected utility (search for similar items in EconPapers)
JEL-codes: D81 G11 G41 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:201:y:2021:i:c:s0165176521000537

DOI: 10.1016/j.econlet.2021.109776

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