Investor Behavior under Prospect Theory : Evidence from Mutual Funds

This paper studies the investment behavior of investors and fund managers within the mutual funds industry. We find that investors are biased in their fund purchase decisions in a way described by prospect theory: The prospect theory value predicts future fund flows, even though it is not related to the funds' future performance. The prospect theory value contains incremental information compared to historical performance measures and subsumes the information content of variables related to the convexity in the flow-performance relationship. Fund managers are not subject to any behavioral bias identifiable by prospect theory when selecting stocks for their fund portfolio