Cognitive Skills and Economic Preferences in the Fund Industry

42 Pages Posted: 28 Oct 2019

See all articles by Adam Farago

Adam Farago

University of Gothenburg - Centre for Finance

Martin Holmen

University of Gothenburg - Department of Economics; University of Gothenburg - Centre for Finance

Felix Holzmeister

University of Innsbruck, Department of Banking and Finance

Michael Kirchler

University of Innsbruck

Michael Razen

affiliation not provided to SSRN

Date Written: October 18, 2019

Abstract

By running a battery of incentivized and non-incentivized experiments with fund managers from four countries in the European Union, we investigate the impact of fund managers' cognitive skills and economic preferences on the dynamics of the mutual funds they manage. First, we find that fund managers' risk tolerance positively correlates with fund risk when accounting for fund benchmark, fund category, and other controls. Second, we show that fund managers' ambiguity tolerance positively correlates with the funds' tracking error from the benchmark. Finally, we report that cognitive skills do not explain fund performance in terms of excess returns. However, we do find that fund managers with high cognitive reflection abilities generate these returns at lower risk.

Keywords: cognitive skills, economic preferences, fund managers, fund performance, experimental finance

JEL Classification: C91, D91, G11, G41, J24

Suggested Citation

Farago, Adam and Holmen, Martin and Holzmeister, Felix and Kirchler, Michael and Razen, Michael, Cognitive Skills and Economic Preferences in the Fund Industry (October 18, 2019). Available at SSRN: https://ssrn.com/abstract=3471922 or http://dx.doi.org/10.2139/ssrn.3471922

Adam Farago (Contact Author)

University of Gothenburg - Centre for Finance ( email )

Box 640
Gothenburg, 405 30
Sweden

Martin Holmen

University of Gothenburg - Department of Economics ( email )

School of Business, Economics and Law
Box 640
Gothenburg, 40530
Sweden
+46 31 786 6442 (Phone)
+46 31 7865114 (Fax)

University of Gothenburg - Centre for Finance ( email )

Box 640
Gothenburg, 403 50
Sweden

Felix Holzmeister

University of Innsbruck, Department of Banking and Finance ( email )

Universitätsstraße 15
Innsbruck, Innsbruck 6020
Austria

Michael Kirchler

University of Innsbruck ( email )

Universitätsstraße 15
Innsbruck, Innsbruck 6020
Austria

Michael Razen

affiliation not provided to SSRN

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