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Limited attention and portfolio choice: The impact of attention allocation on mutual fund performance
Author(s) -
GuptaMukherjee Swasti,
Pareek Ankur
Publication year - 2020
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/fima.12294
Subject(s) - mutual fund , portfolio , portfolio allocation , set (abstract data type) , investment management , target date fund , asset allocation , microeconomics , investment decisions , economics , computer science , finance , behavioral economics , open end fund , institutional investor , incentive , corporate governance , programming language
Abstract This study proposes that the performance of mutual fund managers is linked to how efficiently they allocate attention across assets in their investment set. Motivated by existing models of optimal portfolio choice and rational inattention, we posit that the efficiency of attention allocation increases when a manager chooses larger (smaller) active positions in assets that need more (less) information acquisition effort to resolve uncertainty about future payoffs. We show that the efficiency of attention allocation has a significantly positive impact on future fund performance. Efficient attention allocation has a lesser impact on performance as the total demands on a manager's limited attention increase.