Attention, Lottery, or Salience? The Impact of Extreme Payoffs on Chinese Mutual Fund Flows

51 Pages Posted: 14 Jan 2021

See all articles by Shiyang Hu

Shiyang Hu

Chongqing University - School of Economics and Business Admininstration

Cheng Xiang

Chongqing University - School of Economics and Business Admininstration

Xiaofeng Quan

Soochow University

Date Written: November 8, 2020

Abstract

Using a sample of Chinese mutual funds from 2004 to 2019, we find that investors direct flows into (out of) funds with salient upsides (downsides), controlling for a set of known determinants of fund flows. This effect is robust to alternative measures of key variables and is more pronounced for funds with larger individual ownership. This effect is not explained by individuals’ attention-driven purchases of attention-grabbing funds, funds’ lottery-like features, or the characteristics of funds’ underlying stocks. The salience theory, which argues that extreme payoffs distort individuals’ decision weights on risky asset choices only if these payoffs stand out relative to available alternatives and thus are salient, offers a plausible explanation for this effect.

Keywords: Salience theory; Limited attention; Lottery preferences; MAX effect; Mutual fund flows

JEL Classification: G11; G23; G41

Suggested Citation

Hu, Shiyang and Xiang, Cheng and Quan, Xiaofeng, Attention, Lottery, or Salience? The Impact of Extreme Payoffs on Chinese Mutual Fund Flows (November 8, 2020). Available at SSRN: https://ssrn.com/abstract=3726918 or http://dx.doi.org/10.2139/ssrn.3726918

Shiyang Hu

Chongqing University - School of Economics and Business Admininstration ( email )

Shazheng Str 174, Shapingba District
Chongqing, Chongqing 400030
China

Cheng Xiang (Contact Author)

Chongqing University - School of Economics and Business Admininstration ( email )

Shazheng Str 174, Shapingba District
Chongqing, Chongqing 400030
China

Xiaofeng Quan

Soochow University ( email )

No 50,Donghuan Road
No 50,Donghuan Road
Suzhou, CO Jiangsu 215021
China
0086-0512-67162489 (Phone)

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