48 Pages Posted: 10 Dec 2016 Last revised: 1 Feb 2017
Date Written: December 8, 2016
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: 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