Prospect theory in the field: Revealed preferences from mutual fund flows

Using mutual fund flows, we evaluate prospect theory with choice outcomes in the market. We provide strong support for prospect theory: under a standard set of parameters, funds whose past returns generate higher prospect theory value attract significantly larger future flows; we also find corroborative evidence using account-level data. Taking a revealed preference approach, we estimate the prospect theory parameters through a discrete choice model and find that our field-based estimates align well with previous experiment-based estimates. Moreover, we show that prospect theory offers a new framework for understanding flows, as it has explanatory power beyond existing drivers.

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Publication Details

Journal
Journal of Financial Economics
Published
2025-12-18
DOI
https://doi.org/10.1016/j.jfineco.2025.104221
Primary Topic
Financial Markets and Investment Strategies
Type
article
Field-Weighted Citation Impact
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article

Prospect theory in the field: Revealed preferences from mutual fund flows

Journal of Financial Economics
Financial Markets and Investment Strategies
article

Prospect theory in the field: Revealed preferences from mutual fund flows

article en

Abstract

Using mutual fund flows, we evaluate prospect theory with choice outcomes in the market. We provide strong support for prospect theory: under a standard set of parameters, funds whose past returns generate higher prospect theory value attract significantly larger future flows; we also find corroborative evidence using account-level data. Taking a revealed preference approach, we estimate the prospect theory parameters through a discrete choice model and find that our field-based estimates align well with previous experiment-based estimates. Moreover, we show that prospect theory offers a new framework for understanding flows, as it has explanatory power beyond existing drivers.

Journal of Financial EconomicsVol. 176
University of North Carolina at Charlotte (US), University of Toronto (CA), Chinese University of Hong Kong, Shenzhen (CN), Tsinghua University (CN)
Partnerships for the goals
Openalex Percentile: Top 29%
Financial Markets and Investment Strategies
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Prospect theory in the field: Revealed preferences from mutual fund flows · Journal of Financial Economics (2025) | TGRS Research Map | TGRS