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

See all articles by Swasti Gupta-Mukherjee

Swasti Gupta-Mukherjee

Loyola University Chicago - Department of Finance

Ankur Pareek

University of Nevada, Las Vegas - Lee Business School, University of Nevada - Las Vegas

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

Gupta-Mukherjee, Swasti and Pareek, Ankur, Limited Attention and Portfolio Choice: The Impact of Attention Allocation on Mutual Fund Performance (July 15, 2016). AFA 2013 San Diego Meetings Paper; Midwest Finance Association 2013 Annual Meeting Paper. Available at SSRN: https://ssrn.com/abstract=2024134 or http://dx.doi.org/10.2139/ssrn.2024134

Swasti Gupta-Mukherjee

Loyola University Chicago - Department of Finance ( email )

820 North Michigan Avenue
Chicago, IL 60611
United States

Ankur Pareek (Contact Author)

University of Nevada, Las Vegas - Lee Business School, University of Nevada - Las Vegas ( email )

4505 S. Maryland Parkway
Las Vegas, NV 89154
United States

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