Do Teams Alleviate or Exacerbate Cognitive Biases? Evidence from Extrapolation in Mutual Funds

67 Pages Posted: 11 Feb 2021

See all articles by Ricardo Barahona

Ricardo Barahona

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Stefano Cassella

Tilburg University- School of Economics and Management

Kristy A.E. Jansen

Tilburg University; De Nederlandsche Bank - Research Department

Date Written: February 10, 2021

Abstract

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

Barahona, Ricardo and Cassella, Stefano and Jansen, Kristy A.E., Do Teams Alleviate or Exacerbate Cognitive Biases? Evidence from Extrapolation in Mutual Funds (February 10, 2021). Available at SSRN: https://ssrn.com/abstract=3783421 or http://dx.doi.org/10.2139/ssrn.3783421

Ricardo Barahona

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

Burgemeester Oudlaan 50
Rotterdam, 3062PA
Netherlands

Stefano Cassella

Tilburg University- School of Economics and Management ( email )

Professor de Moorplein 521
Tilburg, 5037
Netherlands

Kristy A.E. Jansen (Contact Author)

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

De Nederlandsche Bank - Research Department ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
60
Abstract Views
386
rank
418,783
PlumX Metrics