Do Teams Alleviate or Exacerbate Cognitive Biases? Evidence from Extrapolation in Mutual Funds
67 Pages Posted: 11 Feb 2021
Date Written: February 10, 2021
Cognitive biases are pervasive, and are known to negatively impact individuals' investment behavior and financial outcomes. However, it is an open question whether cognitive biases are attenuated or amplified when teams, rather than individuals, manage investment decisions. To address this question, we use the mutual fund industry as a laboratory. We focus on how return extrapolation, a cognitive bias that has received considerable attention in recent literature, influences the trading behavior of a team-managed fund compared to the behavior of the individual team members when they manage a fund alone. Using an IV methodology, we show that teams heavily attenuate the influence of return extrapolation on funds' trading and investment performance. Our results shed new light on the role of teams for bias correction, and highlight a potential benefit of team-based asset management.
Keywords: Cognitive Biases, Extrapolation, Heuristics, Mutual Funds, Teams
JEL Classification: G23, G41, D91
Suggested Citation: Suggested Citation