Working Paper: CEPR ID: DP15012
Authors: Martin Weber; Jan Mueller-Dethard
Abstract: This study asks whether a simple, counting-based measure of performance, which is the fraction of winner stocks in a portfolio, affects people’s willingness to invest in the portfolio. We find experimental evidence that indicates that individuals allocate larger investments to portfolios with larger fractions of winner stocks, albeit alternative portfolios have realized identical overall portfolio returns and show identical expected risk-return characteristics. Building on our experimental findings, we show empirically that the proposed composition measure also matters for the demand of leading equity market index funds. A framework which combines category-based thinking and mental accounting can explain the effect.
Keywords: portfolio composition; investment behavior; risk preferences; mental accounting
JEL Codes: G11; G12; G40; D84
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| portfolio composition effect (G11) | independent of expected returns and volatility (G19) |
| fraction of winner stocks in equity market indices (G12) | subsequent fund inflows (F21) |
| higher fraction of winner stocks (G11) | larger investments allocated (G31) |
| portfolio composition (G11) | investment behavior (G11) |