Prospect Theory and Mutual Fund Flows

Ariel Gu, Hong Il Yoo

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)

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.

Original languageEnglish
Article number109776
JournalEconomics Letters
Volume201
Early online date11 Feb 2021
DOIs
Publication statusPublished - Apr 2021

Keywords

  • Behavioral finance
  • Mutual fund
  • Non-expected utility
  • Portfolio choice
  • Prospect theory

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