Abstract
AbstractWe investigate the impact of cognitive skills and economic preferences on fund managers' professional decisions by running a battery of experiments with them. First, we find that fund managers’ risk tolerance positively correlates with fund risk when accounting for fund benchmark, fund category and other controls. Second, we show that fund managers’ ambiguity tolerance positively correlates with the funds’ tracking error from the benchmark. Finally, we report that cognitive skills do not explain fund performance in terms of excess returns. However, we do find that fund managers with high cognitive reflection abilities compose funds at lower risk.
Highlights
There is a growing survey-based, experimental, and empirical literature showing that economic preferences inuence investment decisions and portfolio returns among private investors
Result 1: Neither cognitive skills nor economic preferences and attitudes towards competition do systematically contribute to abnormal returns or value added
We report a negative relationship between risk tolerance and abnormal returns, indicating that more risk-tolerant fund managers underperform fund managers with lower levels of risk tolerance
Summary
There is a growing survey-based, experimental, and empirical literature showing that economic preferences inuence investment decisions and portfolio returns among private investors. Skills in nancial literacy are positively correlated with (risk-adjusted) portfolio returns (Bianchi, 2018; Von Gaudecker, 2015) and various forms of cognitive skills predict traders’ performance in laboratory asset markets (Corgnet et al, 2018) Up to now, it is an open question whether similar behavioral patterns hold for institutional investors like fund managers as well, or whether their education, decade-long experience in the industry, incentives, and the institutional framework reduce or even eliminate the impact of economic preferences, personality traits, and cognitive skills on their professional behavior.
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