Extrapolation and Rational Inattention: Evidence from Chinese Mutual Funds

Antonio Guarino, Gang Wang and Yang Yu

No 20533, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We examine the role of extrapolative beliefs in professional investors’ decision-making using a novel dataset of Chinese mutual fund managers. By applying textual analysis to semiannual reports, we quantify market expectations and link them to portfolio choices. We find that fund managers systematically extrapolate past returns, which hinders market timing but enhances stock picking. These effects offset, leaving overall performance unaffected. Extrapolation increases during economic expansions, when idiosyncratic risk is relatively more important. Our results align with the theory of rational inattention, suggesting that extrapolation is a resource-efficient strategy.

Keywords: Fund managers skills; Expectation formation; Extrapolation; Chinese mutual fund industry; Rational inattention (search for similar items in EconPapers)
JEL-codes: D83 G11 G12 G23 (search for similar items in EconPapers)
Date: 2025-08
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