Fooled by randomness: Investor perception of fund manager skill

TY - JOUR

T1 - Fooled by randomness

T2 - Investor perception of fund manager skill

AU - Heuer, Justus

AU - Merkle, Christoph

AU - Weber, Martin

PY - 2017/1/1

Y1 - 2017/1/1

N2 - Return-chasing investors almost exclusively consider top-performing funds for their investment decisions. When drawing conclusions about the managerial skill of these top performers, they tend to neglect fund volatility and the cross-sectional information contained in the number of funds and the distribution of skill. In multiple surveys of sophisticated retail investors, we show that they do not fully understand the role of chance in experimental samples of fund populations. Respondents evaluate each fund in isolation and do not sufficiently account for fund volatility. They confuse risk taking with manager skill and are thus likely to over-Allocate capital to lucky past winners.

AB - Return-chasing investors almost exclusively consider top-performing funds for their investment decisions. When drawing conclusions about the managerial skill of these top performers, they tend to neglect fund volatility and the cross-sectional information contained in the number of funds and the distribution of skill. In multiple surveys of sophisticated retail investors, we show that they do not fully understand the role of chance in experimental samples of fund populations. Respondents evaluate each fund in isolation and do not sufficiently account for fund volatility. They confuse risk taking with manager skill and are thus likely to over-Allocate capital to lucky past winners.

UR - http://www.scopus.com/inward/record.url?scp=85018956044&partnerID=8YFLogxK

U2 - 10.1093/rof/rfw011

DO - 10.1093/rof/rfw011

M3 - Journal article

AN - SCOPUS:85018956044

SN - 1572-3097

VL - 21

SP - 605

EP - 635

JO - Review of Finance

JF - Review of Finance

IS - 2

ER -