We use cookies to ensure that we give you the best experience on our website. By continuing to browse this repository, you give consent for essential cookies to be used. You can read more about our Privacy and Cookie Policy.

Durham Research Online
You are in:

Prospect Theory and Mutual Fund Flows

Gu, Ariel and Yoo, Hong Il (2021) 'Prospect Theory and Mutual Fund Flows.', Economics letters., 201 . p. 109776.


We evaluate the hypothesis that investors seek portfolios that display attractive return distributions in terms of Prospect Theory (PT). We consider the mutual fund market in the U.S. as an interesting testbed because fund investors are known to be return-chasing and about a half of U.S. households own mutual funds. Using monthly flow data from 1999-2019, we find that mutual funds attract higher net flows when they have better PT values. We obtain similar results when PT is replaced with Rank-Dependent Utility, a closely related theory that does not require a particular choice of reference points. Our results are consistent with recent evidence that fund flows exhibit heightened sensitivity to extreme performance measures.

Item Type:Article
Full text:(AM) Accepted Manuscript
Available under License - Creative Commons Attribution Non-commercial No Derivatives 4.0.
Download PDF
Publisher Web site:
Publisher statement:© 2021 This manuscript version is made available under the CC-BY-NC-ND 4.0 license
Date accepted:07 February 2021
Date deposited:22 February 2021
Date of first online publication:11 February 2021
Date first made open access:11 August 2022

Save or Share this output

Look up in GoogleScholar