Reference-Dependent Preferences and Mutual Fund Flows
40 Pages Posted: 13 Aug 2019 Last revised: 10 Nov 2021
Date Written: November 9, 2021
In this paper, we use the well-documented mutual fund flow-performance relationship to infer investors' preferences under global risk aversion (GRA) and reference-dependent preferences (RDP). Our methodology yields parameter values for the two frameworks that maximize the explanatory power of risk-adjusted returns on fund flows. We provide evidence that RDP outperforms the GRA framework, suggesting that mutual fund investors exhibit loss aversion and have differential attitudes toward risk over losses (risk-seeking) and gains (risk-averse) when evaluating fund performance. Furthermore, we show that these results are driven by retail investors, whereas institutional investors penalize risk over the entire spectrum of returns.
Keywords: Reference-Dependent Preferences, Mutual Fund Flows, Investor Behavior
JEL Classification: G11, G12, G23
Suggested Citation: Suggested Citation