Positive Illusions and Forecasting Errors in Mutual Fund Investment Decisions |
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| Institution: | 1. School of Social Work University of Connecticut West Hartford, Connecticut USA;2. Center for Applied Behavioral Health Research University of Wisconsin-Milwaukee Milwaukee, Wisconsin USA;3. United States Drug Testing Laboratories, Inc. Des Plaines, Illinois USA;1. Department of Pediatric Surgery, Children''s Hospital Boston-Harvard Medical School, Boston, MA, USA;2. Department of Pediatric Surgery, St. Louis Children''s Hospital, Washington University, St. Louis, MO, USA;3. Department of Surgery, Northwestern University, Feinberg School of Medicine, Chicago, IL, USA;4. Division of Pediatric Surgery, Ann and Robert H. Lurie Children''s Hospital of Chicago, Chicago, IL, USA;5. Department of Pediatric Surgery, Children''s Hospital of Wisconsin, Medical College of Wisconsin, Milwaukee, WI, USA;6. Department of Pediatric Surgery, Seattle Children''s Hospital, University of Washington, Seattle, WA, USA;7. Division of Pediatric Surgery, Primary Children''s Hospital, University of Utah, Salt Lake City, UT, USA;8. Department of Anesthesia, Children''s Hospital Boston-Harvard Medical School, Boston, MA, USA;1. Department of Finance, McCombs School of Business, University of Texas at Austin, United States;2. Department of Finance, Lee Kong Chian School of Business, Singapore Management University, Singapore;3. Department of Finance, Thammasat Business School, Thammasat University, Thailand |
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| Abstract: | This study examines the portfolio allocation decisions of 80 business students in a computer-based investing simulation. Our goal was to better understand why investors spend so much time and money on actively managed mutual funds despite the fact that the vast majority of these funds are outperformed by pas sively managed index funds. Participants' judgments and decisions provided evidence for a number of biases. First, most participants consistently overestimated both the future perfor mance and the past performance of their investments. Second, participants overestimated the intertemporal consistency of portfolio performance. Third, participants were more likely to shift their portfolio allocation following poorer performance than following better performance, and this tendency had a negative impact on portfolio returns. We speculate that these biases in investor behavior may contribute to suboptimal investment decisions in real financial markets. |
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