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The majority of comparable previous research works (chapter 1.2. provides a detailed review of comparable research contributions) detected that, even though there are no clear indications on performance persistence, there is statistically significant and positive correlation between mutual fund past performance and lagged fund (net) flows – indicating that investors let themselves be significantly steered by past performance, and by past short-term performance in particular. Moreover these studies generally identified their underlying flow-performance relationships to be depicting a convex form, meaning that investors are strongly chasing past winners but are only very hardly getting rid of past losers. Based on such findings (and other rather illogical investor reactions that are being documented within this chapter), actual behavior of mutual fund investors appears to be far from being entirely rational. In order to be able to better explain indications for irrational investor behaviors that potentially could occur during the later following model executions, this chapter will deliver condensed insights into how behavioral finance research is generally documenting and justifying such investor reactions.
KeywordsMutual Fund Investor Behavior Behavioral Finance Convex Form Mutual Fund Performance
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