Prospect Theory in the Field: Revealed Preferences from Mutual Fund Flows

56 Pages Posted: 28 Jun 2021 Last revised: 1 Dec 2023

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

University of North Carolina (UNC) at Charlotte - Finance

Date Written: April 1, 2021

Abstract

Using mutual fund flows, we evaluate prospect theory with choice outcomes in the market. We provide strong support for prospect theory: under a standard set of parameters, funds whose past returns generate higher prospect theory value attract significantly larger future flows; we also find corroborative evidence using account-level data. Taking a revealed preference approach, we estimate the prospect theory parameters through a discrete choice model and find that our field-based estimates align well with previous experiment-based estimates. Moreover, we show that prospect theory offers a new framework for understanding flows, as it has explanatory power over and above existing drivers.

Keywords: Prospect Theory, Revealed Preference, Investor Demand, Mutual Funds

JEL Classification: G11, G40

Suggested Citation

Han, Bing and Sui, Pengfei and Yang, Wenhao, Prospect Theory in the Field: Revealed Preferences from Mutual Fund Flows (April 1, 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

University of North Carolina (UNC) at Charlotte - Finance ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States

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