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.
Institutions
- University of North Carolina at Charlotte (US)
- University of Toronto (CA)
- Chinese University of Hong Kong, Shenzhen (CN)
- Tsinghua University (CN)
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
- 0.00