Abstract
ABSTRACT Standard portfolio theory predicts that investors should invest in diversified portfolios, whatever their risk aversion. The asset management industry, however, is characterized by a lot of differentiated investment funds advertised to investors. This is inconsistent with the predictions of standard portfolio theory and standard rationality assumptions. Apart from the recent inflation of funds there exists also an increase of fund families, which is inconsistent with portfolio theory. The number of funds managed by managing companies has increased tremendously. The paper aims at providing an explanation based on behavioural aspects as documented by the behavioural economics literature. We focus on the flow–performance relationship and show how the convexity of the flow–performance relationship creates incentives for management companies to inflate the family of funds offered.
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