Investor Behavior under Prospect Theory: Evidence from Mutual Funds

53 Pages Posted: 11 Feb 2021 Last revised: 15 Mar 2021

See all articles by Jin Guo

Jin Guo

Frankfurt School of Finance and Management

Lorenzo Schoenleber

Collegio Carlo Alberto

Date Written: December 24, 2020


This paper studies the investment behavior of investors and fund managers within the mutual funds industry. We find that investors are biased in their mutual fund purchase decisions in a way described by prospect theory: The prospect theory value predicts future mutual fund flows, despite the fact that it is not related to the mutual funds' future performance. We show that the mutual funds' prospect theory value contains incremental information compared to historical performance measures already discovered in the mutual fund flow literature, and subsumes the information content of variables related to the convexity in the flow-performance relationship. We find that mutual fund managers are not subject to any behavioral bias identifiable by prospect theory when selecting stocks for their mutual fund portfolio. The results are robust to various specifications.

Keywords: Mutual Funds Flows, Prospect Theory, Mutual Funds Performance

JEL Classification: G11, G23, G41

Suggested Citation

Guo, Jin and Schönleber, Lorenzo, Investor Behavior under Prospect Theory: Evidence from Mutual Funds (December 24, 2020). Available at SSRN: or

Jin Guo (Contact Author)

Frankfurt School of Finance and Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322

Lorenzo Schönleber

Collegio Carlo Alberto ( email )

Piazza Vincenzo Arbarello, 8
Torino, Torino 10122

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