Inexperienced Investors and Bubbles

45 Pages Posted: 15 Feb 2007 Last revised: 22 Jan 2009

Stefan Nagel

University of Michigan, Stephen M. Ross School of Business; University of Michigan Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research

Robin M. Greenwood

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 9, 2008

Abstract

We use mutual fund manager data from the technology bubble to examine the hypothesis that inexperienced investors play a role in the formation of asset price bubbles. Using age as a proxy for managers' investment experience, we find that around the peak of the technology bubble, mutual funds run by younger managers are more heavily invested in technology stocks, relative to their style benchmarks, than their older colleagues. Furthermore, young managers, but not old managers, exhibit trend-chasing behavior in their technology stock investments. As a result, young managers increase their technology holdings during the run-up, and decrease them during the downturn. Both results are in line with the behavior of inexperienced investors in experimental asset markets. The economic significance of young managers' actions is amplified by large inflows into their funds prior to the peak in technology stock prices..

Keywords: Mutual Funds, Behavioral Finance, Experience, Learning, Asset Pricing, Stock Price Bubble

JEL Classification: G10, G11, G23

Suggested Citation

Nagel, Stefan and Greenwood, Robin M., Inexperienced Investors and Bubbles (June 9, 2008). AFA 2008 New Orleans Meetings Paper. Available at SSRN: https://ssrn.com/abstract=963050 or http://dx.doi.org/10.2139/ssrn.963050

Stefan Nagel

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

University of Michigan Department of Economics

Lorch Hall
Ann Arbor, MI 48109
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Robin M. Greenwood (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6979 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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