Whose Money is Smart? Mutual Fund Purchases of Private Investors
29 Pages Posted: 18 Feb 2009 Last revised: 16 Mar 2009
Date Written: February 15, 2009
This paper contributes to the growing body of literature on mutual fund purchasing decisions, smart investment decision making and household finance. By using administrative data allowing for an empirical analysis on investor-specific level we derive three key findings. First, it is shown that lacking investor sophistication is the dominant driver preventing investors from chasing historical performance. Second, we find that smart investment decisions are made by investors that are older, more experienced, wealthier and less overconfident. Financial advice only improves fund selection if initial charges are not taken into account. Third, evidence on the economic impact of smart decision making is provided, pointing out that smart investor realizes an on average 127bp higher portfolio return per year.
Keywords: Smart decision making, Mutual funds, Fund selection criterion, Household finance, Cost of investment mistakes
JEL Classification: D14, G11, G23
Suggested Citation: Suggested Citation