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Cognitive Skills and Economic Preferences in the Fund Industry

Do financial professionals behave according to prospect theory? An experimental study

Adam Farago, Martin Holmén, Felix Holzmeister (), Michael Kirchler and Michael Razen

The Economic Journal, 2022, vol. 132, issue 645, 1737-1764

Abstract: We investigate the impact of cognitive skills and economic preferences on fund managers' professional decisions by running a battery of experiments with them. First, we find that fund managers’ risk tolerance positively correlates with fund risk when accounting for fund benchmark, fund category and other controls. Second, we show that fund managers’ ambiguity tolerance positively correlates with the funds’ tracking error from the benchmark. Finally, we report that cognitive skills do not explain fund performance in terms of excess returns. However, we do find that fund managers with high cognitive reflection abilities compose funds at lower risk.

Date: 2022
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