Abstract
Using a sample of Chinese mutual funds over 2007–2021, we explore whether prospect theory (PT) accurately represents the risk preferences and behavior of Chinese fund investors. We find a significant positive relationship between the fund-level PT value and future flows. After controlling for the other lottery-type characteristics of fund returns, various characteristics of funds and fund families, and the convexity of the flow–performance relationship, the relation remains robust. Moreover, investors’ preferences for the lottery-type characteristics of PT values rather than increased fund visibility induce net fund inflows. Further, PT values positively and significantly predict future fund performance and skills. In the Chinese market, the flow–PT relationship is present among individual and institutional investors. Hence, we further expand the application scope and influencing mechanism of PT, providing a Chinese perspective of its application.
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