Behavioral Biases of Mutual Fund Investors

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  • 1 January 2010
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      • Published in RePEc
Abstract
We examine the effect of behavioral biases on the mutual fund choices of a large sample of U.S. 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. Beyond documenting the importance of behavioral factors in the delegated management setting of mutual funds, applying factor analysis to the individual behavioral bias measures and other characteristics identifies several investor stereotypes that we relate to mutual fund trading and performance.
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