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

See all articles by Indraneel Chakraborty

Indraneel Chakraborty

University of Miami

Alok Kumar

University of Miami - School of Business Administration

Tobias Muhlhofer

University of Miami - Department of Finance

Ravi Sastry

University of Melbourne - Department of Finance

Date Written: December 26, 2018

Abstract

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

Chakraborty, Indraneel and Kumar, Alok and Muhlhofer, Tobias and Sastry, Ravi, If You Show It, They Will Use It: The 'CAPM Heuristic' and Mutual Fund Allocation Decisions (December 26, 2018). 8th Miami Behavioral Finance Conference 2017; University of Miami Business School Research Paper No. 2869426. Available at SSRN: https://ssrn.com/abstract=2869426 or http://dx.doi.org/10.2139/ssrn.2869426

Indraneel Chakraborty

University of Miami ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States
312-208-1283 (Phone)

HOME PAGE: http://sites.google.com/site/chakraborty/

Alok Kumar

University of Miami - School of Business Administration ( email )

514 Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://moya.bus.miami.edu/~akumar

Tobias Muhlhofer (Contact Author)

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

HOME PAGE: http://tobias.muhlhofer.com

Ravi Sastry

University of Melbourne - Department of Finance ( email )

Level 12
198 Berkeley Street
Victoria 3010
Australia

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