A Test of the Self-Serving Attribution Bias: Evidence from Mutual Funds

48 Pages Posted: 3 Mar 2008 Last revised: 20 Dec 2010

See all articles by Darwin Choi

Darwin Choi

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Dong Lou

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Date Written: December 16, 2010

Abstract

This paper studies the dynamics of investor overconfidence. Using the sum of absolute deviations from one's benchmark index (i.e., Active Share) as a proxy for confidence, we show that the average mutual fund manager tends to boost his confidence to a larger extent after receiving confirming public signals than to decrease it after disconfirming public signals. This bias is stronger among inexperienced managers and is largely absent among experienced ones. The bias also leads to poor future performance, the majority of which is driven by managers' sub-optimal portfolio choices. In dissecting managers' portfolio choices, we further document that the underperformance resulting from biased attribution is potentially due to managers' increasingly active stock picks in industries that they are less familiar with.

Keywords: Overconfidence, Active Share, Mutual fund performance

JEL Classification: G12, G14, G23

Suggested Citation

Choi, Darwin and Lou, Dong, A Test of the Self-Serving Attribution Bias: Evidence from Mutual Funds (December 16, 2010). Fourth Singapore International Conference on Finance 2010 Paper. Available at SSRN: https://ssrn.com/abstract=1100786 or http://dx.doi.org/10.2139/ssrn.1100786

Darwin Choi (Contact Author)

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

Dong Lou

London School of Economics & Political Science (LSE) ( email )

Department of Finance
Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)207 1075360 (Phone)

HOME PAGE: http://personal.lse.ac.uk/loud/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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