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Cognitive Dissonance and Mutual Fund Investors
Abstract
We present evidence from questionnaire responses of mutual fund investors about recollections of past fund performance. We find that investor memories exhibit a positive bias, consistent with current psychological models. We find that the degree of bias is conditional upon previous investor choice, a phenomenon related to the well-known theory of cognitive dissonance. Psychological and economic frictions in the mutual fund industry are examined via a cross-sectional study of equity mutual funds. We find an unusually high frequency of poorly performing funds, consistent with investor "inertia." We also examine the differential responses of investment dollars to past performance, controlling for supervisorship. These show that the effect is confined to the top quartile. We find little evidence that the response to poor performance is unusual.
... Moreover, their study shows that more sophisticated investors, including professional investors, are less affected by this effect, which is consistent with the higher asymmetry in flow response in our results for Norway, a much younger and less developed mutual fund industry, when compared to that observed in the USA. In addition, Goetzmann and Peles (1997) argue that investor memories exhibit a positive bias, explaining why investors put weight on fund performance information when a fund does well and tend to shade the performance information when a fund underperforms. Furthermore, they also find that the positive bias is stronger for less sophisticated investors, that is supported in the results of Sirri and Tufano (1998) and Huang et al. (2007) studies that show that sophisticated investors buy more top-performing funds and do not sell poorly performing funds. ...
... 8 We next investigate whether Morningstar ratings demonstrate performance predictability. The predictive power of the star rating system is a debatable issue because, although different studies show that top-rated funds get more cash inflows (Goetzmann and Peles 1997;Sirri and Tufano 1998), the literature also shows that those inflows do not necessarily translate into future performance (Blake and Morey 2002;Morey 2005). We test for Morningstar ratings predictability using the framework in Blake and Morey (2000), but unlike previous work, we include a number of variables proxying for fund and firm visibility and control for a number of fund characteristics that have been shown to predict abnormal performance. ...
... Because the Norwegian mutual fund industry is much younger and less developed, we would expect to find a higher asymmetry in flow response in Norway when compared to that observed in the USA. Moreover, Goetzmann and Peles (1997) argues that investors memories exhibit a positive bias which explains why investors flock more rapidly to winning funds than sell bottom-performing funds. Furthermore, their results also show that the positive bias is stronger for less sophisticated investors, which supports the findings in Sirri and Tufano (1998) and Huang et al. (2007) that show that sophisticated investors buy more top-performing funds and do not sell funds that do poorly. ...
This paper studies the effect of Morningstar ratings on fund flows and fund performance predictability using a proprietary data set of equity funds from Norway. Controlling for a number of variables proxying for fund and firm visibility, we find that fund flows respond asymmetrically to changes in Morningstar ratings. Specifically, 4- and 5-star rated funds get more flows, and funds upgraded to 5-star get significantly more flows not only in the next month, but also over the following 12 months after the rating change. Downgraded funds suffer outflows, but the results only become statistically significant when fund performance falls to a 2-star rating. We also find evidence of long-term performance predictability for top-rated funds.
As the mutual fund industry develops worldwide, our results suggest that Morningstar has been successful in bringing its brand name to markets outside the USA, and that Morningstar ratings are a valuable tool for helping investors make strong investment decisions.
... Knowledge gained in the past will affect cognitive dissonance behavior [31]. The board of directors needs to identify CEOs who have cognitive dissonance behavior in decision making [32]. ...
... Pelindo III pension funds have a bank selection strategy for deposit placements, namely by looking at the bank's CAR, NPF, LDR, FDR [32]. The pension fund has a minimum score of 8.25 for private banks and BUMN / BUMD, which is 8%. ...
... For the money market, deposits and bonds managed DPLK-BNI itself. In line with the findings of [32], which showed a high level of cognitive dissonance in CEOs or investment managers. In choosing mutual funds, investors must select mutual funds in their pension funds, where the core value of mutual funds is to ensure that current investors make wise investment choices. ...
This study aimed to explore overconfidence and cognitive dissonance behavior in the Pension Fund Investment
Manager, both DPPK (Dana Pensiun Pemberi Kerja / Employer Pension Fund) and DPLK (Dana Pensiun Lembaga Keuangan /
Financial Institution Pension Fund) in the New Normal era after Covid-19 Pandemic. Used the qualitative phenomenological
method, data collection carried out by in-depth interviews with six informants who were representatives of 3 pension funds. The
results indicated that from a prudent perspective, DPPK was more conservative than DPLK, for safety considerations, tight control
from superiors, and the least fund made the Investment Manager not function properly. Unlike the DPLK, which had a larger
fund, innovating in investment management was more significant. They tend given the freedom to be responsible for managing
investment funds, although they still didn't violate the corridors and rules of the OJK. These results showed the DPLK had a
higher return than the DPPK
... Moreover, their study shows that more sophisticated investors, including professional investors, are less affected by this effect, which is consistent with the higher asymmetry in flow response in our results for Norway, a much younger and less developed mutual fund industry, when compared to that observed in the USA. In addition, Goetzmann and Peles (1997) argue that investor memories exhibit a positive bias, explaining why investors put weight on fund performance information when a fund does well and tend to shade the performance information when a fund underperforms. Furthermore, they also find that the positive bias is stronger for less sophisticated investors, that is supported in the results of Sirri and Tufano (1998) and Huang et al. (2007) studies that show that sophisticated investors buy more top-performing funds and do not sell poorly performing funds. ...
... 8 We next investigate whether Morningstar ratings demonstrate performance predictability. The predictive power of the star rating system is a debatable issue because, although different studies show that top-rated funds get more cash inflows (Goetzmann and Peles 1997;Sirri and Tufano 1998), the literature also shows that those inflows do not necessarily translate into future performance (Blake and Morey 2002;Morey 2005). We test for Morningstar ratings predictability using the framework in Blake and Morey (2000), but unlike previous work, we include a number of variables proxying for fund and firm visibility and control for a number of fund characteristics that have been shown to predict abnormal performance. ...
... Because the Norwegian mutual fund industry is much younger and less developed, we would expect to find a higher asymmetry in flow response in Norway when compared to that observed in the USA. Moreover, Goetzmann and Peles (1997) argues that investors memories exhibit a positive bias which explains why investors flock more rapidly to winning funds than sell bottom-performing funds. Furthermore, their results also show that the positive bias is stronger for less sophisticated investors, which supports the findings in Sirri and Tufano (1998) and Huang et al. (2007) that show that sophisticated investors buy more top-performing funds and do not sell funds that do poorly. ...
... Having established a body of solid evidence on the impact of religiosity on investors' behavior, the following paragraphs review three strands of literature related to our research objectives. The first strand of the literature shows the importance of past performance to understand the direction of capital flows among funds (Chevalier & Ellison, 1997;Goetzmann & Peles, 1997;Kempf & Ruenzi, 2008;Qureshi et al., 2017;Sirri & Tufano, 1998). Specific to the impact of religiosity on the flow-performance relationship, Peifer (2014) finds that religious SRI funds are the least responsive toward past performance. ...
... Finally, the third strand of the literature argues that money-flows and past performance of funds have a convex or an asymmetric relationship (Arendse et al., 2018;Chevalier & Ellison, 1997;Goetzmann & Peles, 1997;Ippolito, 1992;Z. Rao et al., 2015;Sirri & Tufano, 1998). ...
Using a dataset of 91 Islamic and 78 conventional funds from 2007 to 2016, this study analyzes the flow–return relation of Islamic and conventional funds in Malaysia. We find that the fund flow–return relation for Islamic funds is positive and stronger than that of conventional funds for positive performers. Moreover, Islamic funds still attract fund flows, while conventional funds experience capital outflow during a negative performance. Besides, this study is unique by its attempt to capture the effect of the month of Ramadan on the flow–performance relation of Islamic and conventional funds in Malaysia. Fund outflows of conventional funds increase during the month of Ramadan, though it does not affect the direction of money-flows either in or out of an Islamic fund. These findings reflect the limited choice availability and significance of religion for Muslim investors. Furthermore, to have an in-depth understanding of the smart-money effect, this study also examines the impact of relative performance on money-flows. Interestingly, the findings show that not only the top and bottom performers of Islamic funds attract larger money inflows and but also suffer larger money outflows than their conventional counterparts. Overall, this paper provides strong evidence that investors consider Islamic and conventional financial assets as different asset classes, and given religious restrictions, investors of Islamic funds act financially smarter than those of conventional funds.
... Ippolito (1992) [4] states that an investor is ready to invest in those fund or schemes which have resulted in good rewards and most investors ' are attracted by those funds or schemes that are performed better over the worst. Goetzmann (1997) [3] opined that investor's psychology affects mutual fund selection for investment and to withdraw from the fund. Singh and Jha (2009) [6] conducted a study on awareness & acceptability of mutual funds and found that consumers basically prefer mutual fund due to return potential, liquidity and safety and they were not totally aware about the systematic investment plan. ...
... Ippolito (1992) [4] states that an investor is ready to invest in those fund or schemes which have resulted in good rewards and most investors ' are attracted by those funds or schemes that are performed better over the worst. Goetzmann (1997) [3] opined that investor's psychology affects mutual fund selection for investment and to withdraw from the fund. Singh and Jha (2009) [6] conducted a study on awareness & acceptability of mutual funds and found that consumers basically prefer mutual fund due to return potential, liquidity and safety and they were not totally aware about the systematic investment plan. ...
Mutual fund industry has recorded a rapid growth in the past two decades. The concept of mutual fund is gaining more recognition and importance among the investors. A wide array of institutes contends to lure the investing public. To fulfill the expectations of investors, a proper evaluation and assessment of performance of mutual funds, their comparison with other funds, ability of the funds to diversify and to time the investment of mutual funds is of great practical importance for making investment decisions. Mutual funds provide a roadmap to the common investor so as to participate in the capital market with professional fund management irrespective of the amount of investment. Mutual fund as a part of financial markets is gaining popularity among investors because of their convenient nature, and they provide an opportunity to invest in a diversified, professionally managed portfolio with easy operations and good returns. Risk averse investors prefer to invest in mutual funds rather than investing in stock because they consider it a safer option because of the low risk associated with it. However, mutual funds are not favoured by many other investors because they are more dependent upon volatile stock markets and the product range to satisfy the retail investor is not clearly differentiated. Further the performance of mutual funds becomes complex while accommodating to risk and return measurement. Henceforth, studying mutual funds from a different perspective becomes imperative which is to focus on the perception and expectations of investors and disclosing the incognito parameters that attribute for the discontentment. This paper makes an attempt to highlight various factors affecting perception of investors regarding mutual funds.
... Although current wisdom generally advises us on the weight of each criteria when customers evaluate whether to invest in a certain fund, we still have limited knowledge about how consumers perceive performance corresponding to the factors of each fund (Goetzmann & Peles, 1997). Given that, it is risky for fund companies to adopt business ventures for particular funds without clear guidance. ...
Investors in Taiwan prefer to invest in offshore funds, and they are good customers in the eyes of the world's major fund companies. Funds are competing these investors through these 3,400 bank branches. Literature has indicated comprehensive selection criteria when investors choosing a fund, yet no study revealed the gap between what investors’ expected and experienced. The current study conducted a survey among these investors with importance-performance analysis (IPA) to fill this gap. There were two parts in the questionnaire, first part was drawn from literature to measure funds, and the second part was summarized from several depth interviews based on SERVQUAL with senior investors. 240 valid responses from current fund investors. The factors investor’s preference in evaluating a fund may be different in terms of residence areas and age. Perceived importance of fund selection criteria is not significantly different in terms of gender, education, marriage, and income levels. Test results indicated that “investment performance record”, “management fees” and “additional features” of fund, and the “sympathy” dimension of bank should be first improved by either fund or bank company respectively.
... The final dataset includes 18820 fund years of 257 pension funds that remained active longer than one fiscal year. As pointed out by Chevalier and Ellison (1997), Goetzmann and Peles (1997), and Sirri and Tufano (1998), any remaining potential survivorship bias does not affect the relationship between flow and performance. Table 1 lists the variables and the definitions. ...
Purpose
This paper aims to investigate private pension fund investor sentiment against fund performance and cost in an environment of frequent regulatory changes. The analyses are conducted in a low return, high-cost private pension fund market environment, which makes it easier to observe the relationship between investor sentiment to return and cost.
Design/methodology/approach
This paper conducts fixed effect, random effect and random effect within between effect panel data analyses of all Turkish private pension funds from 2011 to 2019. This paper conducts the analyses using aggregate data and subsets based on fund characteristics and pre-post regulation periods.
Findings
When regulations provide compensation and improve market efficiency in a pension fund market, investor focus shifted from performance to cost. Investors allocated assets with respect to return realization when adequately compensated for risk or had favorable cost contract clauses. Consequently, investors in pension funds with lower expected returns and no special fee reduction clauses tended to adopt the strategy of cost minimization.
Research limitations/implications
The overlap of regulatory change periods could complicate the ability to distinguish the impact of any one specific change. The findings therefore cannot be generalized to differently structured markets.
Practical implications
Regulatory changes could lead to a switch of investor objectives. When regulatory changes compensate investors and increase market efficiency, investors objective could switch from performance to cost.
Originality/value
This study investigates investor sentiment in a relatively young private pension fund market, in which the relevant regulatory body ambitiously implements frequent changes in regulation. The selected market is unique in the sense that it has negative real returns and high costs, which make investor focus to return and cost more readily apparent.
... Shanmugham (2000) conducted a survey of 201 individual investors to study the information sourcing by investors, their perceptions of various investment strategy dimensions and the factors motivating share investment decisions, and reports that among the various factors, psychological and sociological factors dominated the economic factors in share investment decisions. Goetzman (1997) states that there is evidence that investor psychology affect Fund/scheme selection and switching. ...
With progressive liberalization of economic policies, there has been a rapid growth of capital market, money market and financial services industry including merchant banking, leasing and venture capital. Consistent with this evolution of the financial sector, the mutual fund industry has also come to occupy an important place. To meet these needs of the population new financial instruments like mutual funds and institutions like Asset Management Company (AMCs) are aimed at increasing the range of investment avenues. It is really challenging for the companies to change the attitude and perception of people. This research paper attempts to review and assess the preference of the investors for investment in mutual funds. Further, it intends to throw light in improving the efficiency of investing surplus money by the investors towards mutual funds.
... On the other hand the large investors sold their losing stocks promptly (especially in optimistic periods when stock market was rising) thus confirming that cognitive dissonance impacts small investors with losing (more so during optimistic periods). Another interesting example of application of dissonance with respect to fund houses was given by (Goetzmann and Peles, 1997). Using a response method, a survey was conducted amongst fund's investors and the result showed that all types of investors including those well informed ones, had a bias about their past behaviour. ...
Purpose-To empirically test the concept of cognitive dissonance on Indian Stock Market using variables; return on a stock index and volatility of stock return (VIX). Design/methodology/approach-The entire methodology revolves around five hypothesis (Hypothesis I to V) which have been drawn mainly from Hibbert, et al., (2008), Daigler, et al., (2014) and Bagchi, D. (2014) and Fleming et al., (1995). Findings-Results could provide evidence that the Cognitive Dissonance seem to be working on the psyche on Indian investors. It was found that not only current return on Nifty but also past Return on Nifty impacted change in volatility of Nifty. Similarly it was also found that Past Volatility Change was impacting Current Volatility. Both these findings showed the applicability of the concept of cognitive dissonance in Indian markets. The results also showed that there was evidence that leverage theory and volatility feedback theory were present in Indian markets. Research Limitations/implications-Study uses daily closing prices of Indices, intra-day prices at much smaller intervals may be used to get a more insight into the aspect of cognitive dissonance. Practical implications-The study shows the applicability of cognitive dissonance, leverage theory and volatility feedback theory in Indian stock market. Originality-The testing of the behavioural concepts like cognitive dissonance amongst Indian investors is still quite under-researched area and more research is required especially to link different behavioural biases to different stock market patterns. Any step in this direction would be a great help in forecasting the market in a better manner.
... Moreover, market considerations, such as the presence of search costs, load charges, or tax patterns, increase the transaction costs of withdrawing money from poorly performing funds (cf., Sirri and Tufano 1998). Goetzmann and Peles (1997), who found a substantial relationship between flows and past returns, albeit only for the top quartile of past performance, pointed to the existence of a cognitive dissonance bias, which makes investors ignore the information about bad fund performance. They showed that investors were positively biased in remembering the past performance of the fund they chose. ...
This paper is a review of literature for findings on the flow–performance relationship of mutual funds. It is noted that the discussed issue has been examined virtually exclusively in developed countries. There are no or only fragmentary findings of this kind in developing economies. Based on a survey of empirical findings, it is possible to outline the main directions of research within the strands examined by contemporary researchers and explain the basic assumptions when formulating hypotheses. Moreover, the evaluation of the existing literature lets to offer several propositions for future research. It is a preliminary paper that systematises the analysed subject matter and an introduction to an empirical study dedicated to small European mutual fund markets. Keywords: mutual funds, performance, net flows, individual investors, behavioral finance
... While the resulting "buyer's remorse" may have various resolutions-including returning purchased products-research suggests that in the end individuals quite often resort to dissonance-reducing self-persuasion along the lines of my motivating parable. See, e.g., Ehrlich et al. (1957), Knox and Inkster (1968), and Goetzmann and Peles (1997). ...
The paper considers how consumers’ cognitive efforts at preference adjustment at the time of decision affect prices in competitive markets with differentiated products. Greater ease of self-persuasion implies higher prices when self-persuasion reinforces first impressions and lower prices when the best opportunities to persuade oneself exist for consumers with weak initial impressions. Exogenous interventions to ease decision-complementing cognition—e.g., advertising—predictably increase or reduce prices, depending upon how they are targeted. While facilitation of consumers’ adjustment always improves welfare in a covered market, firms’ appropriation of surplus may make consumers worse off even as they learn better to love what they get.
... A new-fangled term with respect to mutual fund return is "spillover effects" between funds in a family-e.g.,a situation when a good performance by one fund augments cash inflow to other funds in the family as well and it has been strongly supported by Khorana and Servaes (1999).It has also been observed that many times fund families actively publicize the performance of their best performing funds to endorse perceptiveness and resultantly greater cash inflows. Ippolito (1992), , Goetzmann and Peles (1997), Chevalier and Ellison (1997), and Sirri and Tufano (1998) revealed that mutual fund investors reward good performers more as compare to penalizing poor performers. As a resultant, some fund families, especially with lower ability, try to generate more and more star funds to dole out their share even to low performers. ...
Indian mutual fund industry is experiencing tremendous growth, which is the outcome of
infrastructural expansion and advancement in India. This paper contributes to the mutual
fund performance literature by bridging the gap of an empirical research based on
determinants of mutual fund family as a predictor of mutual fundperformance in the context
of Indian mutual fund industry.In preference to treating mutual fund as an entirely
independent entity, it has been treated as a larger group, the mutual fund family. It has been
witnessed that creating multiple mutual funds is somehow inefficient. So, to overcome the
inadequacy associated with single stand alone funds, fund family concept has been launched.
This paper encapsulates the central line of reasoning of mutual fund separation theorem and
with this foundation it presents the influential factors which contour the fortune of a fund
family and its associated funds in the Indian market in the form of an analytical graphical
model which represents a set of variables and their interrelationships on the basis of structured
questionnaire based on Inductive approach and Likert scale method of responses. Along with
this, effect of demographic variables on investor's decision have also been analyzed.A sample
size of 200 based on stratified sampling technique has been considered, which have been
bifurcated as 100 mutual fund professionals and 100 mutual fund investors.PCA Method of
Exploratory Factor analysis has been used for data analysis. Sampling frame considered for
data collection are the mutual fund professionals along with mutual fund investors from
Delhi/ NCR.
Results of the study reveals that compared to stand alone funds, a fund family has a greater
flexibility in reallocating its human and other resources in response to market opportunities
and its performance is mainly affected by factors like fund family returns, market coverage,
economies and management structure of fund family.Along with this demographic variables also play a very crucial part in framing the psyche of an investor about any investment
avenue, especially mutual funds. As mutual funds are in an embroyonic stage in India as
compared to global market.
... In an experiment with university staff and MBA students, Choi et al. (2010) find that a large share of subjects do not minimize fees and focus mainly on past performance when choosing S&P 500 index funds. Goetzmann and Peles (1997) find evidence of overly optimistic recollection of past performance in a survey of mutual fund investors. ...
I analyze a simple model of competition in fees among mutual funds. The funds are vertically differentiated in terms of the expected return they can generate for investors. Following Berk and Green (2004), I assume that a fund’s net return is decreasing in the amount of capital it manages, and that there is an infinite supply of capital by rational investors. Unlike the Berk-Green model, I assume there is also a finite supply of capital by non-rational investors who naively chase recent net returns. Investor behavior and the funds’ fee profile induce a long-run average amount of managed capital for each fund. I analyze Nash equilibrium in the game played by the funds, focusing on the implications of fund skill on fees, capital flows and net performance.
... (1) The investor does not have all the information on fund operations, the implicit expenses that they entail nor previous evidence regarding the evaluation of their results, among others. Alternatively, investors might be affected by cognitive dissonance bias (Goetzmann and Peles 1997;Pompian 2006), given that they may not accept new evidence or information which conflicts with pre-existing understandings since it causes psychological discomfort. ...
This study shows how investing in mutual funds involves an additional risk, which we call management risk as a consequence of the uncertainty in the results of active management. To address this issue, we analyze a sample of 2539 US equity mutual funds. For comparative purposes, we differentiate among index funds and actively managed mutual funds with different investment styles. We observe that performance distribution shows negative mean, negative skewness, and excess kurtosis. Results also show that management risk is not rewarded with higher abnormal performance. Moreover, higher active management prices are linked to funds with higher management risk and negative asymmetry. Therefore, investors seem to be risk-seeking since they are paying more to participate in high asymmetric bets. Finally, we attempt to solve this puzzle from the behavioral finance perspective.
... Differences in treatments confirm the existence of cognitive dissonance, but remain silent about its magnitude. Contributions in this spirit can be found in the fields of finance (Goetzmann & Peles, 1997;Antoniou et al., 2013;Chang et al., 2016), other-regarding behavior (Konow, 2000;Dickinson & Oxoby, 2011;Matthey & Regner, 2011), and social and political attitudes (Di Tella et al., 2007;Elinder, 2012). Finally, our work is closely related to recent works in political literature that show that incentivized surveys substantially reduce the gap in stated beliefs between groups of partisans (Bullock et al., 2015;Prior et al., 2015). ...
We develop a method to assess population knowledge about any given topic. We define, and rationalize, types of beliefs that form the ‘knowledge spectrum’. Using a sample of over 7000 UK residents, we estimate these beliefs with respect to three topics: an animal-based diet, alcohol consumption and immigration. We construct an information-campaign effectiveness index (ICEI) that predicts the success of an information campaign. Information resistance is greatest for animal-based diets, and the ICEI is highest for immigration. We test the predictive power of our ICEI by simulating information campaigns, which produces supportive evidence. Our method can be used by any government or company that wants to explore the success of an information campaign.
... This definition is close to Goetzmann and Peles's definition (1997), which defines it as individuals changing their thoughts to fit their past actions. Goetzmann and Peles (1997) surveyed individuals investing in mutual funds, collecting information on which investment funds they prefer and what they think about the past performance of these funds. The reported real performances of the mutual funds for the previous year and the perceived performances of the investors that were discovered at the end of the survey were compared. ...
According to traditional finance theories, individuals behave rationally and take financial decisions under this rationality. Contrary to traditional finance theories, behavioural finance states that individuals do not always act rationally because they are affected by emotions and feelings. Thus, behavioural finance can be defined as systematic errors that keep individuals away from rationality. The biases might cause unhelpful or even hurtful decisions. Therefore, a high level of behavioural biases might negatively affect the financial well-being of individuals. It is vital to investigate young adults' financial behaviours as the future of the economies are influenced by their decisions. In this research, behavioural biases among young adults in Bristol, UK and Istanbul, Turkey, was examined to prevent young adults from making irrational financial decisions by identifying the most common behavioural biases. Thus, economies might be robust than today. According to result of this research, young adults have different behavioural biases depending on their culture. The most common biases among young adults in Bristol are over-optimism, anchoring, categorisation, conservatism, and the illusion of control while they are framing, cognitive dissonance, the illusion of knowledge and cue competition among young adults in Istanbul. These common behavioural biases that young adults in Bristol and Istanbul have to lead to many irrational financial decisions. It is not possible to reduce these behavioural biases by direct intervention, and for this, individuals need to be educated. Families may educate young adults about behavioural biases. After that rest of the education about behavioural biases may be given in the schools. Lastly, individuals should be informed about their behavioural biases and possible effects of these biases on their financial well-being.
... However, large funds attract more attention in terms of cash flow from investors, which results in a superior performance in the long run (Goetzmann and Peles 1997;Kacperczyk et al. 2016). Furthermore, scholars have explained that the maintenance of large volumes of investor assets result in a host of trading opportunities for fund managers (Ferreira et al. 2013). ...
This study assesses the effect of fund-level and systemic factors on the performance of
mutual funds in the context of changing market conditions. A Markov regime-switching model is used to analyze the performance of 33 South African equity mutual funds from 2006 to 2019. From the results, fund flow and fund size exert more predictive influences on performance in the bearish state of the market than in the bullish state. Fund age, fund risk, and market risk were found to be the most significant factors driving the performance of active portfolios under time-varying conditions of the market. These variables exert more influence on fund performance under bearish conditions than under bullish conditions, emphasizing the flight-to-liquidity assets phenomenon and risk-aversion behaviour of fund contributors during unstable conditions of the market. Consequently, fund managers need to maintain adequate asset bases while implementing policies that minimize dispersions in fund returns to engender persistence in performance. This study provides novel perspectives on how the determinants of fund performance change with market conditions as portrayed by the adaptive market hypothesis (AMH).
... Fin. -USP, São Paulo esperado a partir da revisão da literatura sobre fundos, o tamanho do fundo (Barber et al., 2005;Chevalier & Ellison, 1997;Ferreira et al., 2012;Sirri & Tufano, 1998) e o desempenho passado (Berggrun & Lizarzaburu, 2015;Ferreira et al., 2012;Goetzmann & Peles, 1997) têm relação positiva com a captação líquida, enquanto a inflação (Brandt & Wang, 2003;Krishnamurthy et al., 2018), a taxa de juros (Cecchetti et al., 2000;Hau & Lai, 2016) e o câmbio (Ferson & Kim, 2012;Krishnamurthy et al., 2018) têm relação negativa com a variável dependente. Por outro lado, a relação negativa encontrada entre a idade do fundo (Barber et al., 2005;Berggrun & Lizarzaburu, 2015;Chevalier & Ellison, 1997;Ferreira et al., 2012), o índice Ibovespa (Choi et al., 2017, Maestri & Malaquias, 2017) e a captação líquida contrariam as expectativas. ...
Based on the assumption that seasonal patterns have been identified in stock market assets and also in the context of equity mutual funds, the aim of this research is to investigate the relationship between the seasonality presented by the January effect and the net flow of Brazilian equity funds. The study extends the potential effects of seasonality beyond the return on stock market assets, demonstrating that seasonal patterns can also be observed in Brazilian mutual fund flows. The literature mostly points to common factors related to the performance of equity mutual funds; therefore this study investigates mutual fund flows, demonstrating that different factors influence the decisions of fund investors, including seasonal factors. The study has practical implications for fund managers, as it highlights a set of variables that can be used to anticipate variations in fund flow, reducing their effects on performance and avoiding costs. The results were estimated using panel data regression analysis. The study sample consisted of 1,010 equity funds, covering the period from January of 2004 to June of 2018. It was found that the average net inflow of Brazilian equity mutual funds is higher in January than in other months of the year, which characterizes the existence of a seasonal pattern in their net flows. However, the effect is different between exclusive and non-exclusive funds. As contributions, our findings: (i) provide a better understanding about the factors related to investor decision-making; (ii) point out new aspects in which exclusive and non-exclusive funds differ; and (iii) present factors that influence mutual fund flows.
... Shankar (1996) points out that the Indian investors do view Mutual Funds as commodity products and AMCs, to capture the market should follow the consumer product distribution model. Goetzman (1997) reported that investor psychology affect fund/scheme selection and switching. Carhart (1997) found that the persistence of performance in actively managed mutual funds is almost completely attributable to common factors in stock returns and scale economics in investment rather than superior portfolio management. ...
Purpose/Objectivity: The present study focuses on the penetration of mutual funds. The study will reflect the awareness level, investment pattern and the selection of a mutual fund scheme and their linkages with the financial objectives of working individuals. Research Design/methodology/Approach: The study demonstrates the investment patterns and decision made by working individuals in selection of mutual funds. The study was conducted using questionnaire survey taking into consideration the selected working individuals with special reference to Bankers, Doctors and Professors of selected regions in India. Practical Implications: Implications of the findings of the study will be to discuss it with Mutual Fund Companies. They can concentrate their efforts towards the promotional aspect and the new product development techniques along with increase in awareness being created in the mind of working individuals towards mutual funds rather than they being converting the majority of their saving into the traditional investments like FDs, Government Securities, Bonds etc. The study will also analyze the investment behavior of working individuals to achieve more returns in the form of growth and regular income and attain the desired financial goal. Originality/value: The research paper is an original work based on primary data gathered from the respondents from selected regions of India. The secondary data will support in ascertaining the comprehensive views towards investment pattern in mutual funds.
... Subsequently, people change their attitudes, beliefs, and actions and act irrationally. According to Goetzmann and Peles (1997), investors who have made bad decisions and invested in losing stocks are unwilling to admit their mistake and therefore hold on to them. This leads to a positive convex relationship between past performance and flows. ...
The aim of this study is to investigate star and poor phenomena and their impact on the flows of Islamic-focused family (IFF) and conventional-focused family (CFF). The sample includes the four emerging countries with the largest number of Islamic mutual funds from 2007 to 2018 (Saudi Arabia, Malaysia, Indonesia, and Pakistan). Panel regression analysis was used to examine the impact of dummy star and poor as independent variables, and family age, size, number of funds, past returns, and total risk as control variables for fund family flows. The results show that the dummy star has a significantly positive relationship with family flows. Family managers have succeeded in attracting more investors by using the strategy of advertising the best performing funds. However, in both, all families and IFF, the dummy poor has a negative relationship, but is insignificant. On the other hand, for CFFs, the dummy poor is significantly negative. This is because investors in IFFs, unlike those in CFFs, have more loyalty due to their moral and religious goals in addition to traditional goals. The novel finding of the study is the difference in the star phenomenon between the IFF and CFF. The findings are important for managers, as they will help them to create appropriate strategies to attract more flows and increase the assets under their management. In addition, the findings will help investors to direct their money to appropriate families.
... This notion is corroborated by Khorana and Servaes (1999). Another dimension of the spillover effect was touched upon by Ippolito (1992); Goetzmann and Peles (1997); Chevalier and Ellison (1997); and Sirri and Tufano (1998), as they mentioned that mutual fund investors compensate better players more, compared to reprimanding bad performers. Consequently, fund families struggle to create maximum star funds to distribute their profit margins to low performers. ...
With an ever-increasing amount of information related to the stock market or various investment avenues, misperception or no perception regarding mutual funds is becoming a norm for investors and marketers. To date no perception measuring scale has
been developed for mutual fund investors, to assist investors, marketers, and promoters to focus on the most crucial factors for mutual fund market application. This paper discovers the dimensions of investor perception and its relevance for investment practitioners. A five-factor conceptual model of mutual fund flow is developed, operationalised and validated, using a sample of 3,738 investors. Using exploratory factor analysis and confirmatory factor analysis techniques, results of this study support all the five dimensions of risk, return, fund characteristics, fund manager, and fund family, and confirms that they have a significant impact on investor perception regarding mutual fund investment decision. This work makes an equivalent influence on academic, as well as practical, domains.
... This could lead pension plan investors to have a weaker reaction than mutual fund investors to decrease annual risk-adjusted returns in the short term. Thus, the disposition effect, produced when investors keep their assets in poorly performing funds, is more important in the pension fund industry than in the mutual fund industry in the short-term time horizon based on the theory of investor cognitive dissonance (Goetzmann & Peles, 1997). This could incentivize managers, who simultaneously manage mutual funds and pension plans, to favour their mutual fund clients over their pension plan clients (Nohel, Wang & Zheng, 2010), in order to attract assets belonging to new mutual fund investors while retaining cautious pension plan investors, allowing managers to increase the assets under management and their associated management fees -in absolute terms-. ...
The purpose of this paper is to compare the performance of mutual funds (pension plans) whose managers simultaneously manage the assets belonging to pension plans (mutual funds) with that reached by mutual funds (pension plans) whose managers only manage the assets belonging to mutual funds (pension plans). To do this, we present a sample consisting of data corresponding to 115 Spanish equity pension plans and 336 Spanish equity mutual funds in relation to such aspects as risk-adjusted return, management and custodial fees, asset size, creation date, number of participants, name of the companies administering the assets for the period between February 2007 and June 2011. On this data, we propose a model using the bootstrap technique. The results obtained show no significant relationship between side-by-side management and financial performance in mutual fund and pension plan industries. Therefore, we do not find evidence that pension plan investors are being exploited.
... Other studies which highlight the importance of studying asset allocation of pension funds include Brinson et al. (1991); Ibbotson and Kaplan (2000) for the US, Blake et al. (1999) for UK pension funds and Brown et al. (2010) for university endowment funds. Other US based studies find that the performance of the fund is very important for the investment choice of members, see for example, Sirri and Tufano (1998), Goetzmann and Peles (1996) and Lynch and Musto (2003). 2 Our study contributes to the literature of pension funds' asset allocation in a number of aspects. In terms of the methodological approach, the hidden Markov Switching models have widely been used to investigate the asset allocation issues in many markets, including stock, bond, and commodities (e.g., Bae et al., 2014;Dias et al., 2015;Reus & Mulvey, 2016;Nystrup et al., 2019;among others). ...
We extend an observable Markov Regime Switching framework to assess the switching behaviour of asset classes of Australian superannuation funds across different fund sizes. We identify the most prominent asset class which contributes to the performance of the investment options and what factors trigger funds’ decisions on rebalancing their portfolio. We find that smaller funds tend to be more active in switching to aggressive options and the larger funds are more conservative. However, in periods of volatility, the large funds are the risk seekers and tend to switch their asset classes and hence their investment strategies. The asset classes whose values add to the performance of the investment options are equity markets and bond markets with the domestic equity market having better performance than international equity market. The switch for the larger funds is driven by volatility of the equity market.
... The study found that Income Schemes and Open-ended Schemes are more preferred than Growth Schemes (Jambodekar, 1996). Goetzman (1997) states that investor psychology has influenced fund scheme selection. The objective of the scheme is to offer regular and steady income to investors. ...
Mutual funds offer variety of schemes according to the need of individuals. Behavioral bias is influencing preference of mutual
fund schemes. In the present paper, comparative study between the investment preference of bank employees in Tripura for
investment in mutual fund sponsored by the bank where they are working and other mutual funds, is analyzed and interpreted.
It is found that majority of bank employees in Tripura are having high preference level towards their own bank sponsored
mutual fund. Thus, employees are exhibiting familiarity biases towards selecting the schemes of mutual fund. The study is
original in nature. Our study strongly suggests that there is a need for implementing investors education program to enhance the
level of financial literacy and to remove the familiarity biases of bank employees being mutual fund investors.
While the fund performance management literature has clearly documented that the fund size, fund family size, and net cash flow are important antecedents of equity fund performance, prior empirical studies have revealed mixed results that have not been adequately explained. Through the lens of the contingency perspective, we developed a conceptual model that examines how the expense ratio and management compensation as contextual factors interact with the fund size, fund family size, and net cash flow to affect equity fund performance. The empirical analyses were based on panel data including 690 equity funds in China over a 7-year period from 2009–2015. The results show that the expense ratio and management compensation moderate the effects of the fund family size and net cash flow on fund performance, and management compensation also moderates the relationship between the fund size and fund performance.
The news media have been described by Shiller ([2000]. Irrational Exuberance. Princeton, NJ: Princeton University Press.) as fundamental propagators of speculative price movements. We test whether investors react differently to sentiment in bull and bear markets using the tone of reporting in the Financial Times as a proxy for sentiment. Our sentiment proxy is a daily measure covering the period from 1899 to 2010. We find that the tone of the Financial Times influences trading volume during bull markets. These findings are consistent with noise traders driving trade during speculative booms and Shiller’s press-as-propagators hypothesis.
The aims of this paper are to detect evidence of institutional investor herding behaviour and examine the role that investor sentiment plays in institutional investor herding behaviour. The herding behaviour is investigated by examining the dispersion of time varying beta of UK open-end and closed-end funds. The study finds evidence of fund manager herding behaviour, which suggests they are likely to herd on market portfolio, size, and value factors. UK market-wide investor sentiment index is used for investigating the effects of investor sentiment on institutional herding behaviour. We find a unidirectional investor sentiment effect on the herding of UK mutual fund managers. We also reveal that the sentiment factors affecting UK open-end and closed-end fund managers herding behaviour are different due to the differences in fund structure.
Drawing on regret and reputation literatures, the authors demonstrate how positive corporate associations can mitigate the effects of share performance on investor regret. Three studies are presented, the first involved the observation of six investment club meetings. The second is a survey of investors exploring some of the findings of the first study, specifically the relationship between investor regret and corporate associations. The final study uses an experimental design to test whether corporate social responsibility (CSR) messaging can influence regret in the context of disappointing share performance by influencing corporate agreeableness. The main findings are that a range of corporate associations are important to investors, more so than actual share performance, in their decision-making. Specifically, the more agreeable (e.g. trustworthy, supportive) the company is perceived to be, the lower will be any regret felt over share performance. Finally, CSR information was found to affect regret via an influence on agreeableness.
Purpose
The purpose of this paper is to study the sensitivity of provident fund investors to past performance and how market conditions, changes in risk and liquidity levels influence the net flows into provident funds by using a unique sample from Israel.
Design/methodology/approach
The study checks the impact of different levels of fund performance on provident fund flows using three alternative proxies for performance: raw return and the risk adjusted returns based on the Sharpe ratio and the Jensen’s α . The analysis relies on the time fixed effect and fund fixed effect regression models.
Findings
Results reveal that there exists an approximately concave flow–performance relationship and performance persistence among Israeli provident funds. Israeli provident fund investors are risk averse so they overreact to bad performance both in bull and bear markets. Moreover, liquidity is an important factor to influence the flow–performance curve. The investors’ strong negative response to poor performance and relative insensitivity to outperformance show that provident fund managers are not rewarded for their risk-shifting activities as in mutual funds.
Originality/value
The authors explore the behavior of investor flows in non-institutional retirement savings funds specifically outside of the USA, which is a topic not properly investigated in literature. Moreover, examining inflows and outflows separately gives the authors a richer understanding of investors in pension schemes. This study also enhances the understanding of the impact of fund liquidity on the flow–performance relationship for the retirement funds segment.
Recent scholarship has shown that the strength of national identity can be affected by election outcomes, and these changes hinge, in part, on partisan identities. Research on partisan identities highlights the behavioural effects of negative partisan attitudes in contrast to the more established positive dimension of partisanship. This study considers the impact of the 2015 Canadian federal election outcome upon national identities. Using data from the 2015 Canadian Election Study, findings show the change of government affected identification with Canada, depending on the presence and type of partisan identities held by electors and upon the level of campaign attention.
The arrival of “FinTech” – non-bank companies offering financial services through new technology – has changed the regulatory landscape of the financial markets. This is especially the case in the funds transfer market. While terrorist finance might have once been more at risk of detection in some jurisdictions than others, FinTech threatens to bring about a levelling of risk across jurisdictions. To what extent, though, do we expect decision-makers engaged in transferring funds for terrorism to switch seamlessly in response to changes in risk? Because terrorist finance requires choice under risk and uncertainty, it may be characterized by systematic patterns of error deriving from human decision-making processes. These errors cause delays, or “stickiness” in adaptation to new conditions and may provide openings for counter-terrorist finance (CTF).
Purpose
The objective of this paper is to explore how anchoring affects the dynamics of investor decision-making with regard to mutual funds and how this bias differs amongst gender and level of financial knowledge.
Design/methodology/approach
An experimental research design was adopted to uncover the relationship between the variables under study; this involved the use of a questionnaire with an embedded experiment. Data obtained from the study were analysed using Pearson's chi-square test and two-way analysis of variance.
Findings
The findings show that, overall, investors were prone to be significantly influenced by the anchoring bias. The study finds a strong, albeit not significant, association between participants' susceptibility to anchor and both gender and the level of financial knowledge of participants. Females were observed to be more likely to anchor than their male counterparts. Also, a higher level of financial knowledge did not help to reduce the possibility of anchoring; it rather increased it.
Research limitations/implications
The findings of the study cannot be interpreted as suggesting causality as the study only tests for association between variables and not causality. Additionally, external validity cannot be fully established as a result of the quasi-experiment approach used.
Practical implications
The study adds to the body of knowledge on the influences of behavioural biases in the sub-region to make investors aware of their biases in order to minimise the influence of these biases on their investment decisions.
Originality/value
This study differs from earlier studies in that it analyses the presence of anchoring as influenced by a completely different set of variables (expertise and gender) and also does it within the context of an African country where there remains a paucity of research on behavioural finance.
Klasik ve neo-klasik iktisadın temel varsayımlarından birisi olan Homo Economicus, rasyonel, bencil, kendi faydasını maksimize eden ve bunları yaparken sistematik hata yapmayan hesapçı bir bireydir. Ancak rasyonel yatırımcıların geleneksel fayda maksimizasyonunun birçok ampirik modeli açıklamadaki yetersizliği rasyonaliteyi tartışmaya açmıştır. Davranışsal ve bilişsel psikoloji teorisi ile geleneksel ekonomik ve finansal kararları açıklamaya çalışan nispeten yeni ve hızla yayılan Davranışsal Finans alanı bu aşamada doğmuştur. Davranışsal finans, irrasyonaliteyi dikkate almakta ve karar alma süreçlerinde insan psikolojisinin sistematik bir şekilde etkili olduğunu varsaymaktadır. Dolayısıyla insan beyni, karar verme süreçlerinde kestirmeler ve duygusal filtreler kullanarak öngörülebilir hatalar yapabilecek ve riskten kaçınma gibi kavramları ihlal edebilecektir. Bu doğrultuda davranışsal finans, bireylerin finansal karar alma süreçleriyle, bu kararların doğuracağı sonuçlarla ve daha doğru seçimler yapmalarıyla ilgilenir diyebiliriz. Elinizdeki “Davranışsal Finans: Homo Economicus, Psikoloji, İrrasyonalite” kitabı hem akademik çalışmalara referans olması hem de yatırımcılar ve profesyoneller için kaynak eser olması amacıyla hazırlanmıştır. Kitabın birinci kısmında davranışsal finans teorisi kapsamlı bir şekilde ele alınmış olup, ikinci kısmında ise ampirik uygulamalara yer verilmiştir. Kitap, birçok kişinin emek ve çabalarıyla ortaya çıkmıştır.
We use data from 33 countries to study how a fund’s affiliation with large families shapes the flow–performance relationship internationally. Our results show that the effect of family size on the fund flows’ response to performance depends on the sophistication of investors in a country. While less sophisticated investors are persuaded by the great visibility and strategies of funds that are affiliated with large and established families, more sophisticated investors are not. Affiliation with a large family increases the convexity of the flow–performance relationship in countries where investors are less sophisticated, but decreases this convexity in countries with more sophisticated investors. These results are important for investors, mutual fund companies and regulators because the flow–performance sensitivity determines the assets under management, the level of fees, risk–taking, and the performance of the fund.
در ایران از فعالیت صندوقهای سرمایهگذاری زمان زیادی نمی گذرد، ولی این صندوقها رشد چشم گیری داشته اند. یکی از عوامل موثر بر رشد صندوقها، عملکرد گذشته آنها میباشد. لذا در پژوهش حاضر با انتخاب نمونه ای شامل 42 صندوق سرمایه گذاری در سهام در بازهی زمانی 31 خرداد ماه 90 تا 31 خرداد ماه 92 به بررسی رابطهی رشد نسبی جریان وجوه- عملکرد گذشته میپردازد و هم چنین تاثیر پذیری این رابطه نسبت به متغیرهای کنترلیِ کیفیت عملکرد، سن و اندازهی صندوق بررسی شده است. نتایج حاصله از برازش روش رگرسیونی دادههای تابلویی حاکی از رابطه مستقیم بین عملکرد گذشته و رشد صندوق میباشد. به علاوه، سرمایه گذاران در تصمیمات خود عامل زمان را لحاظ میکنند و نسبت به عملکرد گذشته صندوق به سرعت و با کمترین وقفهی زمانی (حداکثر 2 هفته) واکنش نشان میدهند. به نظر میرسد رشد این صندوقها به صورتی غیر خطی متاثر از عملکرد گذشته است.
La mesure de la performance demeure l'un des sujets controversés et d'actualité. Faut-il alors appréhender la performance des OPCVM en termes de Rentabilité, en privilégiant l'efficacité, en termes de Risque, en privilégiant l'efficience, ou bien en termes de Rentabilité-Risque, en privilégiant la pertinence ? Cet article vise à vérifier les indicateurs de performance adéquats aux OPCVM actions, monétaires, diversifiés, OCT et OMLT au Maroc. Ces indicateurs portent sur trois critères, la rentabilité, le risque et le couple rentabilité-risque. Nous avons travaillé avec des données collectées des tableaux des performances publiés par l'ASFIM. Pour le traitement, nous avons commencé par le classement des OPCVM au sein de chaque catégorie en fonction du critère. Après, nous avons sélectionné l'OPCVM qui répond le mieux au critère et enfin nous avons suivi l'évolution des résultats obtenus par le même critère dans le temps. Les résultats de l'étude des indicateurs de performance montrent que pour chaque catégories d'OPCVM, il y'a un ou des critères qui présentent mieux la rentabilité, le risque et le couple Rentabilité-Risque. Summary: The multiplicity of indicators used to measure performance, as well as the diversity of approaches that assess it, leave researchers and practitioners perplexed as to its adoption and its use within organizations. Measuring performance remains one of the controversial and topical subjects. Is it then necessary to apprehend the performance of UCITS in terms of Profitability, by favoring efficiency, in terms of Risk, by favoring efficiency, or in terms of Profitability-Risk, by favoring relevance? This article aims to check the performance indicators suitable for equity, monetary, diversified, OCT and OMLT UCITS in Morocco. These indicators relate to three criteria, profitability, risk and the profitability-risk combination. We worked with data collected from performance tables published by ASFIM. For processing, we started by classifying the UCITS within each category according to the criterion. Afterwards, we selected the UCITS that best meets the criterion and finally we followed the evolution of the results obtained by the same criterion over time. The results of the study of performance indicators show that for each category of UCITS, there are one or more criteria that better present the profitability, the risk and the profitability-risk combination.
Daily returns at quarter end are above the average by 12% for a sample of stable-NAV money market funds (MMFs) in China from 2011 to 2017. Crucially, quarter-end returns are significantly driven by the deviations between market-based and accounting-based NAVs. Further analyses indicate that returns are intentionally managed upward through NAV deviations to influence fund flows, with the important implication of wealth transfers among exiting, remaining and incoming investors. To the extent that wealth transfers are undesirable from a public policy perspective, our finding lends further support to recent reforms to institute floating-NAV MMFs in various countries including the United States and China.
Questions regarding the specific factors that drive continuous cash allocations by investors into portfolios of actively managed funds, despite consistent underperformance, continue to remain an inexhaustive aspect of the literature that calls for further investigations. This study assesses the dynamic relationship between fund flow and performance of equity mutual funds in South Africa under different market conditions. The study employs a GMM technique to analyze the panel data of 52 South African equity mutual funds from 2006 to 2019. The analysis found that convexity is prevalent in the flow-performance relationship, where fund contributors in subsequent periods allocate recent underperforming and outperforming funds disproportionate cash. This finding is evident in the lack of significance in the past performance effects on subsequent fund flows. The study found that lagged fund flows, fund size, fund risk, and market risk drive subsequent fund flows under changing conditions of the general market and fund markets. Overall, it is posited that fund contributors and asset administrators adapt to prevailing market dynamics relative to trading decisions. As a result,
this affirms the normative guidelines of the Adaptive Markets Hypothesis, leading to the conclusion that exogenous factors drive fluctuations in fund flows in South Africa.
We study a regulation that increased mutual funds’ risk salience through name change. Using daily fund flow data and several identification strategies, we find that requiring certain fixed income mutual funds to affix an exclamation mark ("!") to their names caused a statistically and economically significant decline in their net flows, with a larger effect on fund inflows than outflows. The exclamation mark's impact stems from retail investors, both those that seek financial advice and those that invest independently. Mutual funds “defamed” by the exclamation mark designation actually increased their exposure to the particular risk highlighted by the regulator.
This paper investigates how volatility of performance affects the sensitivity of mutual fund flows to past performance, and examines how investor learning may contribute to this effect. We illustrate theoretically that when sophisticated investors learn from past fund performance to form their posterior expectations of managerial ability, the flow-performance sensitivity should be weaker for funds with more volatile past performance. Moreover, the dampening effect of performance volatility on the flow-performance sensitivity should be stronger for funds attracting more sophisticated investors. We provide supporting evidence for this investor learning hypothesis using mutual fund flows and demonstrate variations in the volatility dampening effect across funds with differing levels of sophistication among investors, such as load versus no-load, high-expense versus low-expense, retail versus institutional, and star versus non-star funds.
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Mutual funds hold 32% of the U.S. equity market and comprise 58% of retirement savings, yet retail investors consistently make poor choices when selecting funds. Theory suggests poor choices are partially due to fund managers creating unnecessarily complex disclosures and fee structures to keep investors uninformed and obfuscate poor performance. An empirical challenge in investigating this “strategic obfuscation” theory is isolating manipulated complexity from complexity arising from inherent differences across funds. We examine obfuscation among S&P 500 index funds, which have largely the same regulations, risks, and gross returns but charge widely different fees. Using bespoke measures of complexity designed for mutual funds, we find evidence consistent with funds attempting to obfuscate high fees. This study improves our understanding of why investors make poor mutual fund choices and how price dispersion persists among homogeneous index funds. We also discuss insights for mutual fund regulation and academic literature on corporate disclosures.
This study examines the roles of fund performance and marketing in superannuation members' fund switching activity in Australia. Using member-nominated transfers from a unique data set of Australian Prudential Regulation Authority (APRA)-regulated superannuation funds from 2005 to 2014, our results indicate that members who switched funds do not chase after superior short-term returns but they do punish bad performers by withdrawing investments. We find a consistent positive relation between marketing effort and investor choice for retail funds, which engage in extensive marketing. However, marketing does not appear to be an effective strategy for industry-based funds to attract investments.
Indian capital market has been growing tremendously in last decades. The Indian Mutual Fund Industry is growing rapidly as a mechanism of pooling together
the investment of unsophisticated investors and turn in the hands of professionally managed fund managers for consistent return along-with capital
appreciation. This paper is an attempt to evaluate perception of individual investors towards Mutual Fund investments in Gujarat State. The finding will help
mutual fund companies (AMC) to identify the factors that influence the perception of investors, for successful design of the product. It can be inferred from this
study that mutual fund investors are moderately aware about mutual funds. Through discriminant analysis it can be stated from the analysis that their
perception towards mutual fund differs as their level of experience. From analysis of investors’ perception it can be concluded that they consider ‘Tax benefits,
Regulatory framework, and Comparative advantage of MFs to other investment avenues’ as most significant criteria while investing in mutual funds.
This study uses the Google search volume index as a direct measure of investor attention to explore the connection between attention-grabbing information and fund flows, future performance, and the survivorship of newly issued funds. We find that investors often engage in attention-driven purchases of new funds that have captured their attention online. However, fund investors who conduct internet searches and make attention-driven purchases are less sophisticated and fail to allocate their capital for earning abnormal returns. We also find that attention-induced inflows can help sustain new funds in competitive fund markets via potential mitigation of mergers and liquidations. Our robustness checks show similar results for old funds, but attention-driven fund flows do not enhance the survival of old funds.
Öz
Geleneksel iktisat ve finans teorilerinde geçerli olan bireyin kararlarında tam bir rasyonaliteye sahip olduğu şeklindeki varsayımın dayanağı antik çağlarda Yunan filozofların insanın evrendeki önemine ilişkin geliştirdikleri düşüncelere kadar uzanmaktadır. İnsanın diğer canlılardan düşünme ve sorgulama yeteneği ile ayrıldığını savunan görüşler bireye mükemmel bir rasyonel düşünme yetisi atfetmiştir. Ancak gerek Galileo ve Kepler gibi bilim insanlarının dünyanın evrendeki konumuna yönelik buluşları gerek Heisenberg ve Einstein gibi fizikçilerin belirsizliği içeren atom modelleri bireyin bilgiye tam olarak erişme ve erişse dahi söz konusu bilgiyi mükemmel şekilde analiz etme yeteneğini sorgulatmıştır. Karar alma teorilerinde sınırlı rasyonalite kavramı gündeme gelmiştir ancak davranışsal finansın ortaya çıkışı ile beynin işleyiş mekanizmasının yol açabildiği bazı bilişsel kısayolların (hevristiklerin) bireyi irrasyonel kararlar almaya ittiği, sınırlı olan rasyonalitenin tamamen ortadan kalkabildiği durumlar olduğu görülmektedir. Bu çalışmada, rasyonel birey düşüncesinin geçirdiği değişim tarihsel süreci içinde anlatılmakta, en yaygın kabul gören hevristikler açıklanarak, literatürde görülen diğer hevristikler de özetlenmektedir.
Anahtar Kelimeler: Rasyonalite, Bilişsel Kısayollar, Bilişsel Önyargılar, Hevristikler.
Jel Sınıflandırması: D90, D81, G40.
The Evolution of the Notion of Rational Individual and Cognitive Heuristics
Abstract
The assumption of perfect rationality which is widely accepted in conventional economics and finance goes back to the notion of ancient Greek philosophers about the importance of human in the universe. The argument on reasoning and questioning as distinctive features of human attributes to perfect rationality. However, either the inventions of Galileo and Kepler about the position of earth in the universe or atomic models of physicists such as Heisenberg and Einstein which considers the uncertainty have raised doubts about the possibility of an individual to get full information or to have the required cognitive abilities for a perfect analysis. The notion of bounded rationality has been
argued in decision making theories, on the other hand associated with the growing number of behavioral finance studies, it has been observed that an individual may behave irrationally based on the heuristics caused by the mechanism of brain activities. In this study, the evolution of the rational individual idea has been argued in its historical process, the heuristics which are widely accepted in the literature have been explained and other heuristics in economics and finance literature have been summarized.
Keywords: Rationality, Cognitive Shortcuts, Cognitive Biases, Heuristics.
JEL Classification: D90, D81, G40.
Questions regarding the specific factors that drive continuous cash allocations by investors into portfolios of actively managed funds, despite consistent underperformance, continue to remain an inexhaustive aspect of the literature that calls for further investigations. This study assesses the dynamic relationship between fund flow and performance of equity mutual funds in South Africa under different market conditions. The study employs a GMM technique to analyze the panel data of 52 South African equity mutual funds from 2006 to 2019. The analysis found that convexity is prevalent in the flow-performance relationship, where fund contributors in subsequent periods allocate recent underperforming and outperforming funds disproportionate cash. This finding is evident in the lack of significance in the past performance effects on subsequent fund flows. The study found that lagged fund flows, fund size, fund risk, and market risk drive subsequent fund flows under changing conditions of the general market and fund markets. Overall, it is posited that fund contributors and asset administrators adapt to prevailing market dynamics relative to trading decisions. As a result, this affirms the normative guidelines of the Adaptive Markets Hypothesis, leading to the conclusion that exogenous factors drive fluctuations in fund flows in South Africa.
The influence of social media trends in the current world has significantly impacted the fashion industry. Hence, the rise of the Islamic fashion culture has expanded to Western countries, which no longer consider Islamic fashion to be dull and boring. Islamic fashion was also constantly misjudged, even by Muslims, as the idea of covering the body and head with a veil or hijab and wearing body-hugging clothes with a bit of exposed hair is accepted as Islamic wear. This indicated a shift of perspective from a conservative to modern culture in Islamic attire, with a lack of understanding of the difference between the two concepts. Therefore, this study identifies the comparison between the
Islamic dress code and modest fashion. The analysis performed used the literature review of previous studies over five years, between 2015 and 2020, using databases from Google Scholar and Scopus. However, only 15 articles were discussed in this study. The review of past literature was based on the crucial keywords related to this study. Modest fashion, the Islamic dress code, and Islamic fashion in Malaysia was the focus
of the keywords research. The study revealed an understanding of the Islamic dress code among past researchers, as Muslims acknowledged the concept of aurah in dressing. Modest fashion, on the other hand, was seen as another fashion movement referring to Muslims, with a combination of religious symbols and modern trends in mainstream clothing brands, together with the marketing strategies of local brand
development focusing on the Muslim demographics. The extent to which a dressing style follows the laws of Syariah, or fits the modern culture, or a combination of both, depending on the individual. As such, this study intends to clarify both the concepts for a better understanding of Islamic wear and modest fashion.
We document the heterogeneous effects of turnover on mutual fund performance, which help explain the weak cross-sectional turnover-performance relations reported in existing studies. For funds skilled in exploiting short-term investment opportunities, there is a positive empirical relation between turnover and performance. For unskilled funds, the relation turns negative. As a result, performance persistence is stronger among funds with higher turnover. Further, we find that the heterogeneous effects of turnover on performance are not driven by liquidity premium or trade execution skills, but rather due to substantial dispersion in short-term stock selection information.
This paper highlights the “dumb money” effect of Indian retail mutual fund investors who chase funds that subsequently underperform. Retail investors show twice the propensity to chase top past performers, their cash flows are strongly negatively correlated to contemporaneous market returns indicating a contrarian rather than a “buy and hold” strategy. They make up to 1.3% less in terms of raw returns compared to institutional investors and the gap is accentuated for funds with superior risk adjusted returns. Collectively the results reveal retail investors trade actively with poor timing and fund selection skills despite having access to professional fund management.
Recent evidence suggests that past mutual fund performance predicts future performance. We analyze the relationship between volatility and returns in a sample that is truncated by survivorship and show that this relationship gives rise to the appearance of predictability. We present some numerical examples to show that this effect can be strong enough to account for the strength of the evidence favoring return predictability.
Hendricks, Patel, and Zeckhauser (1997) (HPZ) find that the response of current to past returns for mutual funds in the presence of survivorship is nonlinear. In our rejoinder to their paper, we verify their results through simulation, provide some intuition for why the result is true, and evaluate the power of their proposed test based upon the J - shape pattern. Theirs is a useful contribution to the growing literature about the issue of survival biases in empirical finance. It may help to explain puzzling results reported in the mutual fund literature, and may provide a guide for future experimental design. Our investigation of the HPZ results led us to a more complete understanding of how differential volatility affects survival - conditioned returns. Our simulations of the test statistic proposed by HPZ suggest that the power of the test is dependent on the absolute level of the threshold, as well as on the magnitude of the cross - sectional differences in variance. While it would be useful to have a reliable test of the conjecture that survivorship is not driving an observed empirical result, we are only beginning to understand the kind of empirical regularities that survival may induce. © 2000 by the President and Fellows of Harvard College and the Massachusetts Institute of Technolog
We investigate the informational efficiency of mutual fund performance for the period 1965–84. Results are shown to be sensitive
to the measurement of performance chosen. Wefind that returns on S&P stocks, returns on non-S&P stocks, and returns on bonds
are significant factors in performance assessment. Once we correct for the impact of non-S&P assets on mutual fund returns,
wefind that mutual funds do not earn returns that justify their information acquisition costs. This is consistent with results
for prior periods.
Recent evidence suggests that past mutual fund performance predicts future performance. We analyze the relationship between
volatility and returns in a sample that is truncated by survivorship and show that this relationship gives rise to the appearance
of predictability. We present some numerical examples to show that this effect can be strong enough to account for the strength
of the evidence favoring return predictability.
Most real decisions, unlike those of economics texts, have a status quo alternative--that is, doing nothing or maintaining one's current or previous decision. A series of decision-making experiments shows that individuals disproportionately stick with the status quo. Data on the selections of health plans and retirement programs by faculty members reveal that the status quo bias is substantial in important real decisions. Economics, psychology, and decision theory provide possible explanations for this bias. Applications are discussed ranging from marketing techniques, to industrial organization, to the advance of science. Copyright 1988 by Kluwer Academic Publishers
Economists and psychologists have recently been developing new theories of decision making under uncertainty that can accommodate the observed violations of standard statistical decision theoretic axioms by experimental subjects. We propose a procedure which finds a collection of decision rules that best explain the behavior of experimental subjects. The procedure is a combination of maximum likelihood estimation of the rules together with an implicit classification of subjects to the various rules, and a penalty for having too many rules. We prove that our procedure yields consistent estimates (as the number of tasks per subject and the number of subjects go to infinity) of the number of rules being used, the rules themselves, and the proportion of our population using each of the rules. We apply our procedure to data on probabilistic updating by subjects in four different universities. We get remarkably robust results which show that the most important rules used by the subjects are Bayes rule, representativeness rule (ignoring the prior), and conservatism (over-weighting the prior). In our procedure, the subjects are allowed to make errors, and our estimated error rate is typically 20%.
A wine-loving economist we know purchased some nice Bordeaux wines years ago at low prices. The wines have greatly appreciated in value, so that a bottle that cost only $10 when purchased would now fetch $200 at auction. This economist now drinks some of this wine occasionally, but would neither be willing to sell the wine at the auction price nor buy an additional bottle at that price. Thaler (1980) called this pattern—the fact that people often demand much more to give up an object than they would be willing to pay to acquire it—the endowment effect. The example also illustrates what Samuelson and Zeckhauser (1988) call a status quo bias, a preference for the current state that biases the economist against both buying and selling his wine. These anomalies are a manifestation of an asymmetry of value that Kahneman and Tversky (1984) call loss aversion—the disutility of giving up an object is greater that the utility associated with acquiring it. This column documents the evidence supporting endowment effects and status quo biases, and discusses their relation to loss aversion.
The research agendas of psychologists and economists now have several overlaps, with behavioural economics providing theoretical and experimental study of the relationship between behaviour and choice, and hedonic psychology discussing appropriate measures of outcomes of choice in terms of overall utility or life satisfaction. Here we model the relationship between values (understood as principles guiding behaviour), choices and their final outcomes in terms of life satisfaction, and use data from the BHPS to assess whether our ideas on what is important in life (individual values) are broadly connected to what we experience as important in our lives (life satisfaction).
Changes in variance, or volatility, over time can be modeled using the approach based on autoregressive conditional heteroscedasticity. Another approach is to model variance as an unobserved stochastic process. Although it is not easy to obtain the exact likelihood function for such stochastic variance models, they tie in closely with developments in finance theory and have certain statistical attractions. This article sets up a multivariate model, discusses its statistical treatment, and shows how it can be modified to capture common movements in volatility in a very natural way. The model is then fitted to daily observations on exchange rates.
According to most economists, economic behavior is a rational undertaking. It is assumed that we know what we want, strive to get it, and accept the verdict of the market for our effort.
In this profound and provocative work, Richard Thaler challenges the received economic wisdom by revealing many of the paradoxes that abound even in the most painstakingly conducted transactions. He presents literate, challenging, and often funny examples of the various anomalies that confront and confound people in everyday economic life—such as "the winner's curse," a dynamic wherein winners become losers by miscalculating the value of a purchase made in a common value auction. He also demonstrates that markets do not always operate with the traplike efficiency we impute to them.
Thaler argues that recognizing these sometimes topsy-turvy facts of economic behavior will compel economists, as well as those who live by their lights in our jobs and organizations, to adopt a more balanced view of human nature, one reflected in Adam Smith's professed belief that despite our selfishness, there is something within our natures that prompts us to enjoy, even promote, the happiness of others. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
In this paper I derive a risk-adjusted measure of portfolio performance (now known as Jensen's Alpha) that estimates how much a manager's forecasting ability contributes to the fund's returns. The measure is based on the theory of the pricing of capital assets by Sharpe (1964), Lintner (1965a) and Treynor (Undated). I apply the measure to estimate the predictive ability of 115 mutual fund managers in the period 1945-1964 - that is their ability to earn returns which are higher than those we would expect given the level of risk of each of the portfolios. The foundations of the model and the properties of the performance measure suggested here are discussed in Section II. The evidence on mutual fund performance indicates not only that these 115 mutual funds were on average not able to predict security prices well enough to outperform a buy-the-market-and-hold policy, but also that there is very little evidence that any individual fund was able to do significantly better than that which we expected from mere random chance. It is also important to note that these conclusions hold even when we measure the fund returns gross of management expenses (that is assume their bookkeeping, research, and other expenses except brokerage commissions were obtained free). Thus on average the funds apparently were not quite successful enough in their trading activities to recoup even their brokerage expenses.
Thesis (Ph. D.)--University of Chicago, Dept. of Economics, August 1996. Includes bibliographical references.
The authors present a simple overlapping generations model of an asset market in which irrational noise traders with erroneous stochastic beliefs both affect prices and earn higher expected returns. The unpredictability of noise traders' beliefs creates a risk in the price of the asset that deters rational arbitrageurs from aggressively betting against them. As a result, prices can diverge significantly from fundamental values even in the absence of fundamental risk. Moreover, bearing a disproportionate amount of risk that they themselves create enables noise traders to earn a higher expected return than rational investors do. The model sheds light on a number of financial anomalies. Copyright 1990 by University of Chicago Press.
This article employs the 1975-84 quarterly holdings of a sample of mutual funds to construct an estimate of their gross returns. This sample, which is not subject to survivorship bias, is used in conjunction with a sample that contains the actual (net) returns of the mutual funds. In addition to allowing the authors to estimate the bias in measured performance that is due to the survival requirement and to estimate total transaction costs, the sample is used to test for the existence of abnormal performance. The tests indicate that the risk-adjusted gross returns of some funds were significantly positive. Copyright 1989 by the University of Chicago.
Performance may enhance survival probability. When it does, the induced lack of randomness challenges robust and unbiased inference. If survivors are sorted into two groups based on past performance, spurious persistence has been demonstrated if variance in performance is heterogeneous. However, as we show both theoretically and with simulations, if performance is categorized finely, the spurious persistence will be J - shaped; that is, at the bottom better performance in one period "predicts" worse performance for another period. We propose a simple t - test applied to the quadratic coefficient in a regression to distinguish between a spurious J - shape and monotonic patterns. Mutual funds, our example, exhibit the monotonically increasing pattern produced by true performance persistence. © 2000 by the President and Fellows of Harvard College and the Massachusetts Institute of Technolog
This paper examines how imperfect institutional memory affects organizational decisions. In our model, a manager knows his firm's previous actions but (owing, e.g., to turnover) not the rationale for these actions. If the environment is stable, we find that a firm that has followed an old policy long enough and then loses memory generally should optimally exhibit excess inertia, defined as a higher probability of following old policies than a full-recall firm. On the other hand, if the environment is volatile or if firm has followed its prior policy only briefly, previous decisions are not very informative, and the firm can exhibit excess impulsiveness (i.e., be more prone to follow new information signals). This suggests that organizational routines and cultural norms should be more extensive and effective in stable environments than in volatile ones. The model implies relationships among observable variables such as the frequency of policy changes, managerial turnover, the quality of record-keeping, the history of project choices, and the volatility of the external environment.
Female Ss were asked to rate each of eight articles on desirability, choose between two of them and rate each of the articles again. In addition, some Ss were exposed to a mixture of good and bad information about the choice alternatives after the choice was made. The results support a prediction that choosing between alternatives would create dissonance and attempts to reduce it by making the chosen alternative more desirable and the unchosen alternative less desirable. A second prediction, that dissonance and consequent attempts to reduce it would be greater, the more closely the alternatives approached equality, also received support.
"Readership of auto advertising by new and old car owners was investigated in order to test some predictions of Festinger's theory of dissonance concerning selective exposure to information following decisions. It was found that new car owners read advertisements of their own car more often than of cars they considered but did not buy and other cars not involved in the choice. These selective tendencies in readership were much less pronounced among old car owners. This finding supports the theoretical derivation that persons in general seek out consonant or supporting information after an important decision in an attempt to reduce dissonance resulting from it." (PsycINFO Database Record (c) 2012 APA, all rights reserved)
This experiment was designed to investigate the effects of 3 variables attainment, expectation of attainment, and merit, involvement, upon the attractiveness of goal objects. Differential results with well-adjusted and poorly-adjusted groups are reported.
The net returns of no-load mutual growth funds exhibit a hot-hands phenomenon during 1974-87. When performance is measured by Jensen's alpha, mutual funds that perform well in a one year evaluation period continue to generate superior performance in the following year. Underperformers also display short-run persistence. Hot hands persists in 1988 and 1989. The success of the hot hands strategy does not derive from selecting superior funds over the sample period. The timing component -- knowing when to pick which fund -- is significant. These results are robust to alternative equity portfolio benchmarks, such as those that account for firm-size effects and mean reversion in returns. Capitiling on the hot hands phenomenon, an investor could have generated a significant, risk-adjusted excess return of 10% per year.
This paper examines a potential agency conflict between mutual fund investors and mutual fund companies. Investors would like the fund company to use its judgment to maximize risk-adjusted fund returns. A fund company, however, in its desire to maximize its value as a concern, has an incentive to take actions that increase the inflow of investments. We use a semiparametric model to estimate the shape of the flow-performance relationship for a sample of growth and growth and income funds observed over the 1982-92 period. The shape of the flow-performance relationship creates incentives for fund managers to increase or decrease the riskiness of the fund that are dependent on the fund's year-to-date return. We examine portfolio holdings of mutual funds in September and December and show that mutual funds do alter the riskiness of their portfolios at the end of the year in a manner consistent with these incentives.
The main goal in this paper is to gauge the sensitivity of conventional measures of abnormal mutual-fund performance to the benchmark chosen to measure normal performance. The authors employed standard CAPM benchmarks and a variety of APT benchmarks to investigate this question and found little similarity between the absolute and relative rankings implied by them. Hence, both the model for risk and return and the method used to construct the APT benchmark are important choices in this context. Finally, the authors found statistically significant measured abnormal performance using all benchmarks. The economic interpretation of this phenomenon appears to be an open question. Copyright 1987 by American Finance Association.
The authors explore performance persistence in mutual funds using absolute and relative benchmarks. Their sample, largely free of survivorship bias, indicates that relative risk-adjusted performance of mutual funds persists; however, persistence is mostly due to funds that lag the S&P 500. A profit analysis indicates that poor performance increases the probability of disappearance. A year-by-year decomposition of the persistence effect demonstrates that the relative performance pattern depends upon the time period observed and it is correlated across managers. Consequently, it is due to a common strategy that is not captured by standard stylistic categories or risk adjustment procedures. Copyright 1995 by American Finance Association.
Empirical researchers commonly invoke instrumental variable (IV) assumptions to identify treatment effects. This paper considers what can be learned under two specific violations of those assumptions: contaminated and corrupted data. Either of these violations prevents point identification, but sharp bounds of the treatment effect remain feasible. In an applied example, random miscarriages are an IV for women’s age at first birth. However, the inability to separate random miscarriages from behaviorally induced miscarriages (those caused by smoking and drinking) results in a contaminated sample. Furthermore, censored child outcomes produce a corrupted sample. Despite these limitations, the bounds demonstrate that delaying the age at first birth for the current population of non-black teenage mothers reduces their first-born child’s well-being.
This paper analyzes how mutual fund performance relates to past performance. These tests are based on a multiple portfolio benchmark that was formed on the basis of securities characteristics. The authors find evidence that differences in performance between funds persist over time and that this persistence is consistent with the ability of fund managers to earn abnormal returns. Copyright 1992 by American Finance Association.
The primary aim of the paper is to place current methodological discussions in macroeconometric modeling contrasting the ‘theory first’ versus the ‘data first’ perspectives in the context of a broader methodological framework with a view to constructively appraise them. In particular, the paper focuses on Colander’s argument in his paper “Economists, Incentives, Judgement, and the European CVAR Approach to Macroeconometrics” contrasting two different perspectives in Europe and the US that are currently dominating empirical macroeconometric modeling and delves deeper into their methodological/philosophical underpinnings. It is argued that the key to establishing a constructive dialogue between them is provided by a better understanding of the role of data in modern statistical inference, and how that relates to the centuries old issue of the realisticness of economic theories.
Rejoinder: The J-shape of performance given survivorship bias Risk-taking by mutual funds as a response to incentives, Working paper Does the stock market overreact?
- Forthcoming
- J Chevalier
- G Elison
____, 1997, Rejoinder: The J-shape of performance given survivorship bias, Review of Economics and Statistics, Forthcoming. Chevalier, J. and G. Elison, 1995, Risk-taking by mutual funds as a response to incentives, Working paper, University of Chicago, Graduate School of Business. De Bondt, W. F. M. and R. Thaler, 1985, Does the stock market overreact?, Journal of Finance 40, 793-805.
The persistenceof poorly performingmutual funds, Working paper
- D Harliss
- S Peterson
Harliss, D. and S. Peterson, 1994, The persistenceof poorly performingmutual funds, Working paper, Virginia Commonwealth University, Department of Economics.
The demand for mutual fund services by individual investors, Working paper
- E Sirri
- P Tufano
Sirri, E. and P. Tufano, 1992, The demand for mutual fund services by individual investors, Working paper, Harvard Business School.
Survivorship and thèU' Shaped Pattern of Response
- J Patel
- R Zeckhauser
Patel, J and R. Zeckhauser, 1992 "Survivorship and thèU' Shaped Pattern of Response".
Selection Bias and Self-Selection," The New PalgravèEconometrics
- J Heckman
Heckman, J., 1990, "Selection Bias and Self-Selection," The New PalgravèEconometrics'