Prospect Theory and Mutual Fund Flows

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