Reference-Dependent Preferences and Mutual Fund Flows

44 Pages Posted: 13 Aug 2019 Last revised: 12 Jan 2022

See all articles by Nikolaos T. Artavanis

Nikolaos T. Artavanis

Tulane University

Asli Eksi

Salisbury University - Perdue School of Business

Date Written: January 9, 2021

Abstract

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 apply more strongly to retail investors, whereas institutional investors penalize risk over the entire spectrum of returns.

Keywords: Reference-Dependent Preferences, Loss Aversion, Prospect Theory, Mutual Fund Flows

JEL Classification: G11, G23, G40

Suggested Citation

Artavanis, Nikolaos T. and Eksi, Asli, Reference-Dependent Preferences and Mutual Fund Flows (January 9, 2021). Available at SSRN: https://ssrn.com/abstract=3434779 or http://dx.doi.org/10.2139/ssrn.3434779

Nikolaos T. Artavanis

Tulane University ( email )

A.B. Freeman School of Business
7 McAlister Drive
New Orleans, LA 70118
United States

Asli Eksi (Contact Author)

Salisbury University - Perdue School of Business ( email )

1101 Camden Avenue
Salisbury, MD 21801
United States

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