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

Doron Nisani, Amit Shelef, Ralph Sonenshine and Or David

International Review of Financial Analysis, 2024, vol. 92, issue C

Abstract: 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.

Keywords: von Neumann-Morgenstern model; Stochastic dominance rules; Mutual funds puzzle; Performance measurement (search for similar items in EconPapers)
JEL-codes: D81 G11 G12 G23 G24 G32 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:92:y:2024:i:c:s1057521924000310

DOI: 10.1016/j.irfa.2024.103099

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