Chapter 21: Behavioral Aspects of Portfolio Investments
Financial Behavior: Players, Services, Products, and Markets. H. Kent Baker, Greg Filbeck, and Victor Ricciardi, editors, 378-396. New York, NY: Oxford University Press, 2017.
Posted: 9 Jun 2017 Last revised: 12 Jun 2017
Date Written: June 1, 2017
Abstract
Investors are inextricably linked to financial institutions, money managers, and the products they market. Mutual funds, exchange-traded funds (ETFs), hedge funds, and pension funds manage or hold roughly $55 trillion in combined wealth. This chapter examines these topics with a behavioral finance approach, focusing on two main ideas: the performance and rationality of each group, and the behavioral biases that relate to individuals’ selection of particular investments within each group. Research indicates that actively managed mutual funds and hedge funds underperform passive investments. Pension funds generate alpha of roughly zero on a risk-adjusted basis. The fees involved in investing in such funds exacerbate the observed underperformance in mutual funds and hedge funds. Behavioral biases provide one perspective on sources of underperformance. Further, individuals exhibit a wide range of behavioral biases that may lead to suboptimal asset allocation, including the selection of mutual funds, ETFs, and hedge funds.
Keywords: behavioral finance, behavioural finance, mutual funds, exchange-traded funds, hedge funds, pension funds, behavioral biases
JEL Classification: A12, D81, G00, G30, G10, M00, M10, M41
Suggested Citation: Suggested Citation