Sensation Seeking, Sports Cars, and Hedge Funds

48 Pages Posted: 10 Dec 2016 Last revised: 1 Feb 2017

Stephen Brown

New York University (NYU) - Leonard N. Stern School of Business

Yan Lu

University of Central Florida-Department of Finance

Sugata Ray

University of Florida - Warrington College of Business Administration

Melvyn Teo

Singapore Management University - Lee Kong Chian School of Business

Date Written: December 8, 2016

Abstract

We find that hedge fund managers who own powerful sports cars take on more investment risk. Conversely, managers who own practical but unexciting cars take on less investment risk. The incremental risk taking by performance car buyers does not translate to higher returns. Consequently, they deliver lower Sharpe ratios than do car buyers who eschew performance. In addition, performance car owners are more likely to terminate their funds, engage in fraudulent behavior, load up on non-index and lottery-like stocks, exhibit lower R-squareds with respect to systematic factors, and succumb to overconfidence. We consider several alternative explanations and conclude that manager revealed preference in the automobile market captures the personality trait of sensation seeking, which in turn drives manager behavior in the investment arena.

Keywords: Sensation seeking, Hedge funds, Risk, Fraud, Overconfidence

JEL Classification: G11, G12, G14, G23

Suggested Citation

Brown, Stephen and Lu, Yan and Ray, Sugata and Teo, Melvyn, Sensation Seeking, Sports Cars, and Hedge Funds (December 8, 2016). 12th Annual Mid-Atlantic Research Conference in Finance (MARC). Available at SSRN: https://ssrn.com/abstract=2882983 or http://dx.doi.org/10.2139/ssrn.2882983

Stephen Brown

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

Yan Lu

University of Central Florida-Department of Finance ( email )

PO Box 161400
Orlando, FL 32816
United States

Sugata Ray

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

Melvyn Teo (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore
+65 6828 0735 (Phone)
+65 6822 0777 (Fax)

Paper statistics

Downloads
3,017
Rank
2,576
Abstract Views
15,606