The Frequency of Outperformance and Investment Decisions

88 Pages Posted: 14 Mar 2023

See all articles by Michael Ungeheuer

Michael Ungeheuer

Aalto University

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: March 10, 2023

Abstract

Does frequent outperformance cause investors to buy? If so, do investors have a preference to outperform most of the time, or does frequent outperformance bias beliefs about the risk and return of an asset? In several randomized experiments, we show that retail investors purchase frequently outperforming assets, even at the cost of large infrequent underperformance and when assets are first-order stochastically dominated. An experiment with asset management professionals confirms that a large fraction of financial intermediaries anticipates investors' attraction to frequent outperformers. The evidence supports a belief-based mechanism, where frequent outperformance causes overoptimism about an asset's risk and return. Our findings have implications for fund management, the design and regulation of structured products, and for the debate on the (ir)relevance of systematic risk for portfolio choice and asset pricing.

Keywords: Investment Decisions, Regret Theory, Salience Theory, Biased Beliefs, Risk Taking.

JEL Classification: C91, G02, G11.

Suggested Citation

Ungeheuer, Michael and Weber, Martin, The Frequency of Outperformance and Investment Decisions (March 10, 2023). Available at SSRN: https://ssrn.com/abstract=4384543 or http://dx.doi.org/10.2139/ssrn.4384543

Michael Ungeheuer (Contact Author)

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101
Finland

HOME PAGE: http://sites.google.com/site/ungeheuermichael/

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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