Prospect Theory in the Field: Revealed Preferences from Mutual Fund Flows
56 Pages Posted: 28 Jun 2021 Last revised: 30 Nov 2023
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: Suggested Citation