What Do Mutual Fund Investors Really Care About?
Charles A. Dice Center Working Paper No. 2019-5
Review of Financial Studies, forthcoming
73 Pages Posted: 14 Mar 2019 Last revised: 28 Sep 2021
Date Written: September 28, 2021
We show that mutual fund investors rely on simple signals and likely do not engage in sophisticated learning about managers' alpha as widely believed. Simplistic performance chasing best explains aggregate flows to the mutual fund space and flows across funds. These results hold for both actively managed and passive index funds. Empirical patterns commonly interpreted as reflecting learning about managerial skill also appear in falsification tests and are mechanical. Our results are consistent with the view that, on average, households are homo sapiens with limited financial sophistication rather than hyperrational alpha-maximizing agents, as often assumed in the literature.
Keywords: Mutual funds, retail investors, fund flows, Morningstar, CAPM, asset pricing models
JEL Classification: G11, G12, G24, G41
Suggested Citation: Suggested Citation