Limited Attention and Portfolio Choice: The Impact of Attention Allocation on Mutual Fund Performance
56 Pages Posted: 18 Mar 2012 Last revised: 8 Aug 2016
Date Written: July 15, 2016
Abstract
This study proposes that the performance of mutual fund managers is linked to how efficiently they allocate attention across assets in their investment set. Motivated by existing models of optimal portfolio choice and rational inattention, we posit that the efficiency of attention allocation increases when a manager chooses larger (smaller) active positions in assets which need more (less) information acquisition effort to resolve uncertainty about future payoffs. We show that the efficiency of attention allocation has a significantly positive impact on future fund performance. Efficient attention allocation has a lesser impact on performance as the total demands on a manager’s limited attention increase.
Keywords: Mutual funds, performance evaluation, limited attention, attention allocation
JEL Classification: G02, G11, G14, G23
Suggested Citation: Suggested Citation
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