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Prospect Theory and Mutual Fund Flows

Gu, Ariel; Yoo, Hong Il

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Authors

Ariel Gu

Hong Il Yoo



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.

Citation

Gu, A., & Yoo, H. I. (2021). Prospect Theory and Mutual Fund Flows. Economics Letters, 201, Article 109776. https://doi.org/10.1016/j.econlet.2021.109776

Journal Article Type Article
Acceptance Date Feb 7, 2021
Online Publication Date Feb 11, 2021
Publication Date 2021-04
Deposit Date Feb 15, 2021
Publicly Available Date Aug 11, 2022
Journal Economics Letters
Print ISSN 0165-1765
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 201
Article Number 109776
DOI https://doi.org/10.1016/j.econlet.2021.109776
Public URL https://durham-repository.worktribe.com/output/1280355

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