Prospect Theory and Mutual Fund Flows

49 Pages Posted: 28 Jun 2021

See all articles by Bing Han

Bing Han

University of Toronto, Rotman School of Management

Pengfei Sui

The Chinese University of Hong Kong, Shenzhen

Wenhao Yang

Chinese University of Hong Kong, Shenzhen

Date Written: April 2021

Abstract

Using mutual fund flow, we empirically test whether choices made by investors are consistent with preferences implied by prospect theory. Our findings support this hypothesis. When allocating capital to mutual funds, investors evaluate funds based on the past performance distribution and choose the ones that deliver the highest utility according to prospect theory. This predictive relation is robust when we control for a large set of known drivers of fund flows, notably alphas. The pattern is more salient among retail and less sophisticated investors. Moreover, all the features of prospect theory contribute to the predictive power.

Keywords: Prospect Theory, Mutual Funds, Asset Pricing, Behavioral Finance

JEL Classification: G11, G40

Suggested Citation

Han, Bing and Sui, Pengfei and Yang, Wenhao, Prospect Theory and Mutual Fund Flows (April 2021). Rotman School of Management Working Paper No. 3867988, Available at SSRN: https://ssrn.com/abstract=3867988 or http://dx.doi.org/10.2139/ssrn.3867988

Bing Han (Contact Author)

University of Toronto, Rotman School of Management ( email )

Toronto, Ontario M5S 3E6
Canada
4169460732 (Phone)

Pengfei Sui

The Chinese University of Hong Kong, Shenzhen ( email )

2001 Longxiang Road, Longgang District
Shenzhen, 518172
China
15810011687 (Phone)
518172 (Fax)

HOME PAGE: http://www.pengfeisui.com

Wenhao Yang

Chinese University of Hong Kong, Shenzhen ( email )

2001 Longxiang Road, Longgang District
Shenzhen, 518172
China

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