Abstract
The economic literature predicts that the average skill level in any industry is higher in larger cities. The existing labor sorting mechanism may also increase overconfidence of managers in financial centers if they attribute too much of their successes to their ability rather than luck. This article examines the relation between managerial ability and behavior across cities using U.S. equity mutual fund data and the Gervais and Odean (2001) model of overconfidence. Funds in financial centers on average perform better in terms of both gross and risk-adjusted returns. These funds however exhibit under-diversification and excessive trading, which is particularly high among young funds and managers and becomes detrimental for performance for high-performing funds and following bull markets. Our results suggest that financial centers attract more sophisticated, yet overconfident money managers. JEL Classification: G14; G23
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