Engelbert Dockner

Professor Dockner´s research concentrates on investment theory, product and financial market interactions, industrial organizations, risk management, volatility models and differential game theory. He is also interested in real options, market structure, asset price dynamics and strategic investment policies.

Fund Promotion and Individual Investor Fund Flows

Funded by the FWF Project # 22304-G16

Aims and Scope

The standard paradigm in financial economics rests on the assumption that investors are rationally acting individuals who choose a portfolio of risky assets that maximizes expected utility for given risk preferences. This implies that any investor’s choice must be based on the expected risk return trade-off for given securities together with her risk tolerance embedded in the risk preferences. As a result, flows into and out of a fund should primarily be driven by expected performance characteristics. Empirical research on mutual funds documents that aggregate investor fund flows are governed by a variety of fund characteristics including fees, past performance, and the fund family. Recently promotion and attention has been an active research topic to explain fund flows. While many of these fund flow drivers are consistent with rational choice theory, the effects of promotion, advertising and attention require a separate treatment.

This project empirically evaluates promotion as one of the sources for fund flows of individual investors. We use a unique data set from an online broker that resulted from a promotion strategy the company employed on a monthly basis over several years. Each month, the online broker promoted a selected fund (the “fund of the month”) by an advertising campaign and a substantial reduction in its front load fee. We make use of this natural experiment to study individual investors’ fund flows triggered by this promotional strategy. As the promotion consists of advertising and cost reductions the resulting fund flow data can be used to disentangle rational (cost driven) from behavioral (advertising driven) fund flows. The data set contains detailed information on every single mutual fund trade of over 20.000 individuals. Moreover, we are able to compare fund flows of the promoted and standard mutual funds.

This project is the first attempt to empirically evaluate the importance of attention and promotion on individual investor fund flows. While similar studies have been carried out with purchase decisions of individual stocks and aggregate fund flows, there has been no empirical evidence yet which looks at the individual investor fund flows.

Research Team:

Engelbert J. Dockner

Petra Halling, Post-Doc funded by the FWF

Otto Randl

Research Papers and Presentations Slides:

Fund Promotion and Individual Investors Fund Flows (Slides)

Fund Promotion and Individual Investors Fund Flows (Working Paper)

Education and Stock Investment Performance (Working Paper)

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