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

76 Pages Posted: 11 Feb 2021 Last revised: 25 Apr 2022

See all articles by Ricardo Barahona

Ricardo Barahona

Banco de España; 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

Whether teams attenuate or exacerbate the behavioral biases which are pervasive at the individual level is an open question. To address this question, we use the mutual fund industry as a laboratory. Our focus is on how return extrapolation is transmitted from individual fund managers to the team-managed funds they join. We show that teams heavily attenuate the influence of extrapolation bias on funds' trading behavior. Additional analysis reveals that this attenuation is not due to differences in investment experience, compensation contracts, workload, and investment styles between solo-managed and team-managed funds. Rather, our evidence suggests that the elicitation of team members' inner cognitive reflection can be responsible for teams' reduction in behavioral biases. Our results highlight the attenuation of the extrapolation bias as a potential benefit of team-based asset management.

Keywords: Behavioral 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 Behavioral Biases? Evidence from Extrapolation Bias 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

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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

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