TY - JOUR
T1 - Behavioral biases of mutual fund investors
AU - Bailey, Warren
AU - Kumar, Alok
AU - Ng, David
N1 - Funding Information:
We thank an anonymous referee, Malcolm Baker (American Finance Association discussant), Nick Barberis, Robert Battalio, Zahi Ben-David, Garrick Blalock, Charles Chang, Susan Christoffersen, Josh Coval, Andrew Karolyi, George Korniotis, Lisa Kramer, Charles Lee, Ulrike Malmendier (AFA session chair), J. Spencer Martin, Jay Ritter, René Stulz, Jeremy Tobacman, Jeff Wurgler, and seminar participants at BSI Gamma Foundation conference (Frankfurt), Cornell University, Federal Reserve Bank of Boston, Ohio State’s Alumni Summer conference, Northern Finance Association meetings, McGill University, and 2009 AFA meetings (San Francisco) for comments and helpful discussions. We also thank Zoran Ivković and Lu Zheng for providing data for identifying the mutual funds in our sample. We are grateful to the BSI Gamma Foundation for financial support. Taehoon Lim provided excellent research assistance. All remaining errors and omissions are our own. Early presentations of this paper were entitled “Why Do Individual Investors Hold Stocks and High-Expense Funds Instead of Index Funds?”
Copyright:
Copyright 2012 Elsevier B.V., All rights reserved.
PY - 2011/10
Y1 - 2011/10
N2 - We examine the effect of behavioral biases on the mutual fund choices of a large sample of US discount brokerage investors using new measures of attention to news, tax awareness, and fund-level familiarity bias, in addition to behavioral and demographic characteristics of earlier studies. Behaviorally biased investors typically make poor decisions about fund style and expenses, trading frequency, and timing, resulting in poor performance. Furthermore, trend chasing appears related to behavioral biases, rather than to rationally inferring managerial skill from past performance. Factor analysis suggests that biased investors often conform to stereotypes that can be characterized as Gambler, Smart, Overconfident, Narrow Framer, and Mature.
AB - We examine the effect of behavioral biases on the mutual fund choices of a large sample of US discount brokerage investors using new measures of attention to news, tax awareness, and fund-level familiarity bias, in addition to behavioral and demographic characteristics of earlier studies. Behaviorally biased investors typically make poor decisions about fund style and expenses, trading frequency, and timing, resulting in poor performance. Furthermore, trend chasing appears related to behavioral biases, rather than to rationally inferring managerial skill from past performance. Factor analysis suggests that biased investors often conform to stereotypes that can be characterized as Gambler, Smart, Overconfident, Narrow Framer, and Mature.
KW - Behavioral biases
KW - Factor analysis
KW - Individual investors
KW - Mutual funds
KW - Trend chasing
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U2 - 10.1016/j.jfineco.2011.05.002
DO - 10.1016/j.jfineco.2011.05.002
M3 - Article
AN - SCOPUS:84860389471
VL - 102
SP - 1
EP - 27
JO - Journal of Financial Economics
JF - Journal of Financial Economics
SN - 0304-405X
IS - 1
ER -