Do investors behave rationally? Many researchers examine actively managed mutual funds to answer this question. The advantage of doing so setting is that we can observe the past performance of fund managers as well as the capital allocation decisions of investors, both at relatively high frequency.
Yet, despite three decades of research on mutual funds, whether investors in mutual funds display rational behavior remains unsettled. The empirical facts are indisputable: While fund managers have a hard time beating their benchmarks and their performance is not consistent over time, investors continue to chase past returns. In a seminal study, Berk and … Read more