Inexperienced Investors and Bubbles
University of Michigan, Stephen M. Ross School of Business; University of Michigan Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research
Robin M. Greenwood
Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)
June 9, 2008
AFA 2008 New Orleans Meetings Paper
We use mutual fund manager data from the technology bubble to examine the hypothesis that inexperienced investors play a role in the formation of asset price bubbles. Using age as a proxy for managers' investment experience, we find that around the peak of the technology bubble, mutual funds run by younger managers are more heavily invested in technology stocks, relative to their style benchmarks, than their older colleagues. Furthermore, young managers, but not old managers, exhibit trend-chasing behavior in their technology stock investments. As a result, young managers increase their technology holdings during the run-up, and decrease them during the downturn. Both results are in line with the behavior of inexperienced investors in experimental asset markets. The economic significance of young managers' actions is amplified by large inflows into their funds prior to the peak in technology stock prices..
Number of Pages in PDF File: 45
Keywords: Mutual Funds, Behavioral Finance, Experience, Learning, Asset Pricing, Stock Price Bubble
JEL Classification: G10, G11, G23
Date posted: February 15, 2007 ; Last revised: January 22, 2009
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