11 Pages Posted: 21 Nov 2015
Date Written: October 26, 2014
We define asset manager career risk as the risk that asset owners terminate an existing manager due to an extended period of underperformance relative to a benchmark or peer group even though the manager has skill (defined here as positive information ratio). We show that myopic loss aversion gives rise to career risk even for skilled asset managers and that current industry practice of quarterly or annual performance evaluations puts even the most skilled asset managers at risk of undue termination. We also investigate how a reduction of tracking error leads to a reduction of career risk even though this comes at the expense of lower long-term performance. Finally, we compute the minimum evaluation period needed to reduce career risk for asset managers of different skill levels.
Keywords: Career risk, myopic loss aversion, prospect theory
JEL Classification: D01, D03, D81
Suggested Citation: Suggested Citation