If You Show It, They Will Use It: The 'CAPM Heuristic' and Mutual Fund Allocation Decisions
55 Pages Posted: 15 Nov 2016 Last revised: 1 Mar 2019
Date Written: December 26, 2018
This study examines whether mutual fund investors employ the “CAPM heuristic” to allocate capital across funds due to lack of financial sophistication or to high information gathering costs. We find that investors appear to adopt the CAPM because most funds only provide information on market returns, and investors with limited attention utilize this salient information. Among sector funds, where both sector and market returns are provided, investors’ allocation decisions additionally respond to sector performance. We find similar results in an experimental setting. Collectively, our results suggest that fund investors’ capital allocation decisions can be improved by providing appropriate performance benchmarks.
Keywords: Limited attention, mutual fund flows, sector funds, information acquisition
JEL Classification: G41, G11, D83
Suggested Citation: Suggested Citation