Revealed Heuristics: Evidence from Investment Consultants’ Search Behavior

Abstract

Using proprietary data from a major fund data provider, we analyze the screening activity of investment consultants (ICs) who advise institutional investors with trillions of dollars in assets. We find that ICs frequently shortlist funds using threshold screens clustered at round, base 5 or base 10 numbers: $500MM for AUM, 0% for the return net of a benchmark, and quartiles for return percentile rank screens. A fund’s probability of being eliminated by a screen is significantly negatively related to its future fund attention and flows, with funds just above the $500MM AUM threshold getting 14 to 18% more page views and 5 to 9 pps greater flows over the next year compared to similar funds just below the threshold. Our results are consistent with ICs using a two-stage, consider-then-choose decision making process, and cognitive reference numbers in selecting screening thresholds.

Keywords: cognitive reference points, heuristics, consider-then-choose, investment consultants, mutual funds, investor search, fund flows

JEL Classification: G41, G11, G14, G29, D83, D03