Journal of Financial Economics 102 (2011) 1–27

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Journal of Financial Economics

journal homepage: www.elsevier.com/locate/jfec

Behavioral biases of mutual fund investors$

Warren Bailey a,n, Alok Kumar b, David Ng c,d
a
Cornell University, Johnson Graduate School of Management, USA
b
University of Miami, School of Business Administration, USA
c
Cornell University, USA
d
University of Pennsylvania, Wharton School, USA

a r t i c l e i n f o abstract

Article history: We examine the effect of behavioral biases on the mutual fund choices of a large sample
Received 19 October 2009 of US discount brokerage investors using new measures of attention to news, tax
Received in revised form awareness, and fund-level familiarity bias, in addition to behavioral and demographic
6 July 2010
characteristics of earlier studies. Behaviorally biased investors typically make poor
Accepted 9 July 2010
Available online 27 May 2011
decisions about fund style and expenses, trading frequency, and timing, resulting in
poor performance. Furthermore, trend chasing appears related to behavioral biases,
JEL classification: rather than to rationally inferring managerial skill from past performance. Factor
G11 analysis suggests that biased investors often conform to stereotypes that can be
D03
characterized as Gambler, Smart, Overconfident, Narrow Framer, and Mature.
D14
& 2011 Elsevier B.V. All rights reserved.
Keywords:
Individual investors
Mutual funds
Trend chasing
Behavioral biases
Factor analysis

1. Introduction

Previous studies of behavioral biases in the investment

$
We thank an anonymous referee, Malcolm Baker (American Finance
Association discussant), Nick Barberis, Robert Battalio, Zahi Ben-David,
Garrick Blalock, Charles Chang, Susan Christoffersen, Josh Coval, Andrew
Karolyi, George Korniotis, Lisa Kramer, Charles Lee, Ulrike Malmendier
(AFA session chair), J. Spencer Martin, Jay Ritter, René Stulz, Jeremy
Tobacman, Jeff Wurgler, and seminar participants at BSI Gamma Foun-
dation conference (Frankfurt), Cornell University, Federal Reserve Bank
of Boston, Ohio State’s Alumni Summer conference, Northern Finance
Association meetings, McGill University, and 2009 AFA meetings (San
Francisco) for comments and helpful discussions. We also thank Zoran
Ivković and Lu Zheng for providing data for identifying the mutual funds
in our sample. We are grateful to the BSI Gamma Foundation for
financial support. Taehoon Lim provided excellent research assistance.
All remaining errors and omissions are our own. Early presentations of
this paper were entitled ‘‘Why Do Individual Investors Hold Stocks and
High-Expense Funds Instead of Index Funds?’’
n
Corresponding author.
E-mail address: Wbb1@cornell.edu (W. Bailey).
decisions of individual investors focus on the selection of
individual stocks. Odean (1998, 1999), Barber and Odean
(2001), and other empirical studies show that the stock-
picking decisions of individual investors exhibit a variety
of behavioral biases. However, little work has been done
to link the decision-making biases of individuals to their
mutual fund investments. Understanding the role of
behavioral biases in individual mutual fund decisions is
important for several reasons.
First, individual investors increasingly use mutual
funds to invest in the equity market instead of trading
individual stocks. French (2008, p. 1539) reports: ‘‘Indivi-
duals hold 47.9% of the market in 1980 and only 21.5% in
2007. This decline is matched by an increase in the
holdings of open-end mutual funds, from 4.6% in 1980
to 32.4% in 2007.’’ Hence, it is increasingly important to

0304-405X/$ - see front matter & 2011 Elsevier B.V. All rights reserved.
doi:10.1016/j.jfineco.2011.05.002
2 W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27
understand how individual investors hold and trade
mutual funds.
Second, even though direct stock trading by indivi-
duals has declined, their mutual fund investment deci-
sions can affect stock returns indirectly. Coval and
Stafford (2007) argue that large flows force some mutual
funds to trade heavily, causing price pressure for secu-
rities held across many funds. Previous papers show that
mutual fund flows affect individual stock returns. Gruber
(1996) and Zheng (1999) find that fund flows are followed
by positive short-term fund returns, perhaps due to a
momentum effect. Frazzini and Lamont (2008) show that
mutual fund flows appear to be ‘‘dumb money’’: Fund
inflows are associated with low future returns, while
outflows are associated with high future returns.
Third, the manner in which individuals employ mutual
funds cuts right to the heart of basic principles of financial
management. Traditional portfolio choice models imply a
simple investment strategy based on well-diversified, low
expense mutual funds and minimal portfolio rebalancing.
Index funds, and other equity funds with low fees and low
turnover, are cheap, convenient vehicles for individual
investors to implement such a strategy. The extent to
which individuals adhere to these principles in their use
of mutual funds is an important measure of the rationality
and effectiveness with which investors approach capital
markets.
The purpose of our paper is to test whether behavioral
biases explain why the use of mutual funds varies sub-
stantially across individual investors and often departs
from the simple strategies suggested by classic theories.
The growing literature on behavioral finance has uncov-
ered a variety of decision-making biases in how investors
use individual common stocks. These behavioral forces
should also have an impact on whether a particular
investor uses mutual funds and whether she uses them
effectively.
The mutual fund literature has already revealed two
specific anomalies. First, individual investors buy funds
with high fees. Gruber (1996) and Barber, Odean and
Zheng (2005) show that many individual investors hold
significant positions in high expense mutual funds. Even
more puzzling is the finding of Elton, Gruber and Busse
(2004) that substantial amounts have gone into index funds
charging high fees (over 2% per year) for passive holdings of
broad indexes such as the Standard & Poor’s (S&P) 500.
Second, individual investors chase returns. Sirri and Tufano
(1998), Bergstresser and Poterba (2002), and Sapp and
Tiwari (2004) find that fund flows tend to chase funds
with high past returns. This could be fostered by Morning-
star’s practice of rating funds based on past returns
(Del Guercio and Tkac, 2008).
Several explanations have been offered for these two
anomalies. Carlin (2008) explains participation in high fee
index funds using a model with search costs. Choi,
Laibson and Madrian (2010) interpret their experiments
on Wharton School master of business administration
students and participation in high fee funds as consistent
with behavioral biases. Return-chasing has been ascribed
to an agency problem that induces fund managers to alter
the riskiness of the fund to maximize investment flows
instead of risk-adjusted expected returns (Chevalier and
Ellison, 1997). It could also reflect inferring managerial
skill from past returns (Sirri and Tufano, 1998; Gruber,
1996; Berk and Green, 2004). However, with the excep-
tion of the experimental data used by Choi, Laibson and
Madrian (2010), these authors study aggregate fund
flows, not individual investor behavior.
In contrast to previous studies, we link the decision-
making biases of particular individual investors to their
individual history of mutual fund investing using a
database of tens of thousands of brokerage records of US
individual investors. The key to our experiment is the
use of individual investor records of stock holdings and
trading to estimate the behavioral bias proxies that pre-
vious authors have used to explain how investors trade
individual stocks. These individual behavioral bias proxies
are, in turn, related to the mutual fund holdings and trading
of those individuals in a variety of empirical specifications
that reveal different facets of mutual fund investor
behavior.
We can easily imagine behavioral biases affecting
mutual fund selection. For example, the disposition effect
(selling winners too quickly and holding losers too long)
could lead some investors to overestimate expected
holding periods and mistakenly select high front-end load
funds. Investors with narrow framing bias (buying and
selling individual assets without considering total portfo-
lio effects), overconfidence (frequent trading plus poor
performance), or a preference for speculative stocks could
select funds that facilitate aggressive switching across
asset classes without considering higher fees. Local bias
(preference for stocks of companies geographically close
to home) could induce the selection of locally managed
mutual funds without regard to cost or expected perfor-
mance. Investors who view their portfolios in terms of
layers that serve different purposes (Shefrin and Statman,
2000) could demonstrate different behavior in their use of
individual stocks versus mutual funds. For example, if
mutual funds are viewed as substantially safer than
selecting individual stocks on their own, investors could
let their guard down and spend less time assessing fund
performance and costs. Regardless of the type of beha-
vioral bias, poor decisions about timing, holding periods,
and choice of funds can combine with the substantial
variety in mutual fund fee structures to yield poor
performance.
To examine the interactions and consequences of
mutual fund choices and behavioral biases, we adopt
two empirical viewpoints. First, we present tests across
individual investors. Estimates of several dimensions of
behavioral bias for each individual in our sample are used
to explain individual investor choices across index funds,
other types of mutual funds, and individual stocks. We
also test whether behavioral biases influence associations
between trading decisions and recent fund performance
because those biases could cause some investors to
misuse performance information.
Second, we present tests across different types of
funds. We summarize individual investor holding periods
and returns across mutual funds classified by fee struc-
ture and by the extent of several behavioral biases of each
 W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27
fund’s investors. Behaviorally biased investors could clus-
ter in particular types of funds and demonstrate poor
performance or very frequent trading. Furthermore, the
fund industry’s offerings could include some funds
designed to attract and perhaps even exploit such inves-
tors. A large and growing number of mutual funds offer a
variety of themes and fee structures to US individual
investors. Even across relatively generic index funds,
many competing products offer a wide range of fee
structures and resultant performance (Elton, Gruber and
Busse (2004); Hortacsu and Syverson, 2004). It is plausi-
ble that different types of funds attract different clienteles
(Nanda, Wang, and Zheng, 2009), and some funds could
have been designed specifically with behaviorally biased
clienteles in mind.1
A handful of previous papers have examined specific
dimensions of the mutual fund choices of individual
investors. Barber, Odean and Zheng (2005) find that
investors are more sensitive to salient fees such as
front-end loads, but not as sensitive to hidden manage-
ment fees. Christoffersen, Evans and Musto (2006)
consider how fund managers respond to the preferences
of their investors. Malloy and Zhu (2004) show that
investors who reside in less affluent and less educated
neighborhoods tend to select high expense funds. Zhu
(2005) shows that busy investors are more likely to invest
in funds instead of individual stocks. Huang, Wei and Yan
(2007) characterize the effect of the information environ-
ment on the associations between fund flows and past
performance. Bergstresser, Chalmers and Tufano (2009)
study whether mutual fund brokers help educate inves-
tors and attenuate their behavioral biases, but they con-
clude that brokers do not deliver tangible benefits for the
fees they earn. Ivković and Weisbenner (2009) examine
aggregate individual investor fund flows for tax effects.
Our paper offers several substantial contributions.
First, unlike earlier studies, we examine a combination
of behavioral factors, plus controls for other likely influ-
ences on portfolio selection, to reveal the interactions
between investor decisions, the characteristics of the
mutual funds they select, and the consequences for
portfolio performance. Second, because we employ
proxies for a number of dimensions of investor behavior
in our tests, we are also able to study the associations
between different investor characteristics. In particular,
applying factor analysis to the correlation structure of our
investor characteristics reveals interesting overlaps
among biases and other characteristics, and it permits
us to identify and profile five investor stereotypes that we
label Gambler, Smart, Overconfident, Narrow Framer, and
1
Some evidence exists that skilled capital market participants
outsmart individual mutual fund investors. Money market funds appear
to raise fees to exploit investors who are insensitive to fees and
performance (Christoffersen and Musto, 2002). Weak associations
between equity fund fees and performance could also reflect such
behavior (Gil-Bazo and Ruiz-Verdu, 2009). Corporations are aware of
patterns in mutual fund inflows and outflows and attempt to exploit
them in timing equity issues (Frazzini and Lamont, 2008). Mutual fund
inflows are attracted to seemingly high performance assessed against
benchmarks that funds specify but which do not match fund styles
(Sensoy, 2009).
3
Mature. Third, our tests take the viewpoints of both the
investor, who could ignore or misuse mutual funds, and
the mutual fund industry, which could design some of its
products to exploit the poor decision-making skills of
some investors. Last, we extend the empirical behavioral
literature beyond the choice of individual stocks to
decisions about professionally managed portfolios.
A summary of our results is as follows. We find that
sophisticated investors (better informed, higher income,
older, and more experienced) investors make good use of
mutual funds, holding a high proportion of funds for long
periods, avoiding high expense funds, and experiencing
relatively good performance. However, investors with
strong behavioral biases or lack of attention to firm-
specific or macro-economic news are less likely to hold
mutual funds or select mutual funds for the wrong
reasons. When they do buy mutual funds, they trade
them frequently, tend to time their buys and sells badly,
and prefer high expense funds and active funds rather
than index funds. We also find that biased investors are
more likely to chase fund performance, casting doubt on
the idea that trend chasing reflects rational fund selection
decisions.
Evidently, these decisions are suboptimal because they
are associated with lower overall returns. For instance,
top-quintile narrow-framing investors have average
mutual fund returns that are 2.16% lower than those in
the bottom quintile, and top-quintile disposition effect
investors have average returns that are 0.89% lower than
those in the bottom quintile. In contrast, behavioral biases
do not appear to affect the performance of index fund
holdings.
Thus, our behavioral bias and news inattentiveness
proxies, though crude, demonstrate that behavioral
effects are at work in the mutual fund decisions of many
investors and take a toll on performance. Furthermore,
the bias and inattention to news proxies are themselves
correlated in interesting ways that allow us to identify
and study stereotypical investors. The five factors identi-
fied using factor analysis can explain over 75% of the
variance of the behavioral factors and other investor
characteristics. The intuitive combinations of investor
characteristics that comprise these five factors relate to
mutual fund trading habits and performance in an inter-
esting and consistent manner.
The rest of the paper is organized as follows. Section 2
describes our explanatory variables and test specifica-
tions. Section 3 describes the individual investor database
and other data sources. We present our empirical results
in Sections 4 and 5, and we conclude in Section 6 with a
brief discussion.
2. Measuring investor characteristics
Our main objective is to relate mutual fund use and
performance to behavioral factors that vary across our
sample of investors. We begin by using each sample
investor’s record of common stock holdings and trading
to estimate a set of variables that proxy for the behaviors
evident in each investor’s common stock portfolio. Recog-
nizing that behavioral factors are unlikely to be the only
4 W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27
determinant of mutual fund choices, we also construct
controls for other drivers of mutual fund decisions sug-
gested by the mutual fund and behavioral finance litera-
tures. We use these variables in a variety of tests across
individual investors and then across types of mutual
funds. Detailed descriptions of behavioral factors, other
investor characteristics, and references to supporting
papers can be found in Appendix A.
2.1. Behavioral bias proxies
We begin by estimating Disposition Effect and Narrow
Framing, two mental accounting biases that have been
explored extensively in the behavioral finance literature.
The Disposition Effect is the propensity of an investor to
sell winners too early and hold losers too long. As detailed
in Appendix A, we measure each investor’s peer group-
adjusted disposition effect by comparing each investor’s
actual propensity to realize gains versus losses with
a peer group’s propensity to realize gains and losses.
A positive value of our disposition effect proxy indicates
that the investor sells a greater proportion of winners and
a relatively smaller proportion of losers.
Disposition Effect could be related to tax incentives. For
example, selling winners but retaining losers is particu-
larly costly for high-income US individuals. In contrast,
realizing losses in December instead of other months
could represent a sophisticated tax minimization strategy.
To distinguish disposition effect from tax loss selling, we
construct a disposition effect times high income interac-
tion variable (DEnHigh Income) and a disposition effect
times no December tax loss selling interaction variable
(DEnNo December Tax Loss Selling). Selling winners too
soon and holding losers too long is particularly costly for
higher-income investors because they face higher mar-
ginal tax rates. Similarly, a cleaner measure of disposition
effect could be isolated by identifying individuals who
appear entirely unaware of the tax consequences of their
trades. Therefore, both of these interaction terms are
intended to isolate cleaner and severe facets of the
disposition effect.
Our second bias proxy, Narrow Framing, is the propen-
sity of an investor to select investments individually,
instead of considering the broad impact on her portfolio.
Intuitively, the time interval between two consecutive
decisions reflects the decision frame, with temporally
separated decisions more likely to be framed narrowly
than simultaneous decisions. Hence, investors who exe-
cute less-clustered trades are more likely to be using
narrower decision frames. The appendix describes how
each investor’s trade clustering measure is peer-group
adjusted for portfolio size, number of stocks, and trading
frequency. A low trade clustering measure indicates an
investor who is more likely to use a narrow viewpoint in
making investment choices.2
2
Odean (1998) computes Disposition Effect as the proportion of
losses realized minus the proportion of gains realized and notes that this
measure is sensitive to portfolio size and trading frequency. For
example, proportions are likely to be smaller for investors who hold
larger portfolios and trade frequently because those portfolios contain a
Another important concept from the empirical beha-
vioral finance literature is overconfidence, an investor’s
propensity to trade frequently but unsuccessfully. Our
Overconfidence Dummy variable is set to one for investors
in the highest portfolio turnover quintile and lowest
performance quintile for their individual common stock
trading.3 Because male investors typically exhibit over-
confidence, we use a male dummy as an additional proxy
for overconfidence.
Next, we compute a proxy for familiarity, as articu-
lated by Merton (1987) and Huberman (2001).4 Specifi-
cally, the Local Bias of an investor’s common stock
portfolio equals the mean distance between her home
zip code and the headquarters’ zip codes of companies in
her portfolio minus the mean distance to the companies’
headquarters in the market portfolio. Fund Level Local Bias
equals the mean distance between the investor’s home
zip code and the headquarters of the mutual funds in her
portfolio, minus the same measure aggregated across all
funds held by all investors in the sample.
We measure each investor’s preference for gambling
and speculation. Following Kumar (2009), Lottery Stocks
Preference is the investor’s mean portfolio weight (relative
to the weight in the market portfolio) assigned to stocks
that have low prices, high idiosyncratic volatility, and
high idiosyncratic skewness.
Last, we construct two indicators of whether a parti-
cular investor appears to ignore potentially relevant
economic news. One variable captures inattention to
earnings news, and the other captures inattention to
macroeconomic news. Both measures are computed using
each individual’s record of individual stock trades using
the formula 1 (number of investor trades around the
event)/(total number of investor trades), where ‘‘around’’
the event is defined as days t  1, t, and t þ1, where t is the
earnings announcement date. To compute Inattention to
Earnings News, earnings announcements for each stock
held by the individual are collected from the Institutional
Brokers’ Estimate System, I/B/E/S. To compute Inattention
(footnote continued)
larger number of stocks with capital gains and capital losses. Thus, use of
the original measure of the Disposition Effect in cross-sectional analysis is
likely to induce mechanical associations with variables that are corre-
lated with portfolio size and trading frequency. Similar issues apply to
the Narrow Framing measure because the trade clustering measure used
to proxy for narrow framing is correlated with portfolio size, number of
stocks, and trading frequency. Further, there might be a mechanically
induced relation between proxies for Narrow Framing and Disposition
Effect. To minimize the potential influences of portfolio size, number of
stocks, and trading frequency, we compute peer group-adjusted proxies
of both Disposition Effect and Narrow Framing biases. Our stock-level and
fund-level local bias measures are adjusted with the means for the
market. This does not affect estimation because the same constant is
applied to all investors, but this allows us to think about an investor’s
portfolio characteristics relative to a typical investor.
3
We measure the performance and turnover from the stock hold-
ings of the investors for the entire period. We also construct an
alternative measure for performance and turnover using the first year
of investors’ record. The results are very similar.
4
A related concept is home bias, the tendency for some investors to
under-diversify their portfolios internationally. See Bailey, Kumar and
Ng (2008) for evidence that home bias could have its origins in
behavioral biases.
 W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27
to Macroeconomic News, we collect dates of federal funds
target rate (www.federalreserve.gov/releases/h15/update/)
changes, Non-Farm Payroll Reports (www.bls.gov/bls/archi
ved_sched.htm), and producer price index releases (www.
bls.gov/ppi/ppirel.pdf).5
The measures we construct are only proxies for beha-
vioral biases. They do not correspond exactly to the
definitions of decision-making biases in the psychology
literature. Nonetheless, at the very least, these measures
are indicators of suboptimal stock investment decisions.
They reflect portfolio management mistakes and allow us
to measure associations between an individual’s propen-
sity to make such mistakes, his use of mutual funds, and
the consequences for portfolio performance.
Furthermore, there are other ways to think about the
behavioral bias proxies and our results. What we call
‘‘behavioral bias proxies’’ could simply represent each
investor’s ‘‘financial literacy.’’ Put another way, it is costly
to continually acquire the skills and information needed
to make successful investment decisions. While basic
notions of portfolio management suggest that a simple
buy-and-hold use of index funds is a sensible way to
avoid incurring such costs, ‘‘bounded rationality’’ could
lead some investors to other decisions. For example, an
investor could display narrow framing bias if he elects not
to incur the cost of thinking more carefully about invest-
ment decisions.
Aside from recognizing that each investor could
rationally strike a different balance between the costs
and benefits of becoming a better investor, we must also
consider preferences. While a preference for lottery-type
stocks sounds suboptimal and is associated with under-
performance, it could simply represent skewness prefer-
ence in the investor’s objective function.
Finally, some behavioral bias proxies could represent
frictions in the investment process. For example, our
overconfidence proxy identifies investors whose indivi-
dual stock portfolio is high on turnover and low on return.
While this could represent investors who are irrationally
aggressive, it could also reflect a combination of small
portfolio size, commission costs, and other frictions. With
a portfolio of only a few stocks, rebalancing by trading
just one stock yields high turnover, and even overconfi-
dence if performance is poor. If such small investors
recognize that mutual funds are particularly advanta-
geous, this could even induce a correlation between
overconfidence and the propensity to use mutual funds.
Our inclusion of portfolio size as a control variable in our
regressions might not completely correct for such effects.
2.2. Control variables
Though we focus on the behavioral forces for which
Section 2.1 describes proxies, we also control for other factors
that are likely to influence mutual fund choices. Specifically,
we consider a set of demographic characteristics, which
5
Subsequent results shed light on whether inattention is a bias or
part of a sensible passive strategy. For example, Barber and Odean
(2008) find no evidence that trading based on other measures of news
arrival is beneficial.
5
includes Age, Marital Status (a dummy set to one for married
investors), Family Size (number of family members in the
household), Professional Dummy (a dummy set to zero for
the investor in a blue collar profession, one otherwise), and
Retired Dummy (a dummy set to one if the investor is retired).
These factors could proxy for forces, such as the availability of
time to study investments (Zhu, 2005) that can affect
portfolio selection.
Other control variables are more directly related to
each individual’s investment activities. Stock portfolio
diversification is measured as the negative of Normalized
Portfolio Variance (that is, the variance of the portfolio of
individual domestic securities divided by the average
variance of the individual common stocks in the portfo-
lio). Investors who demonstrate awareness of the value of
diversification in their portfolio of individual stocks are
likely to extend that insight into their choice of mutual
funds. Income (the total annual household income) and
Portfolio Size (the sample-period natural log of the average
market capitalization of the investor’s common stock
portfolio) identify investors who are more likely to under-
stand the basic precepts of portfolio management and,
therefore, tend to select index funds or other low expense
funds and hold them for relatively long periods. Invest-
ment Experience (years since the brokerage account was
open) and a dummy for residence in a Financial Center
could indicate more experienced investors with easier
access to information and opinions about investments
(Christoffersen and Sarkissian, 2009). The Options Dummy
equals one if the investor executes at least one option
trade during the sample period. The Short Sale Dummy
equals one if the investor executes at least one short trade
during the sample period.6 Stock Portfolio Performance (the
intercept from the market model time series regression
with the monthly common stock portfolio return as
dependent variable) could identify particularly skillful,
successful investors. Success could originate from a vari-
ety of strategies, ranging from selecting individual stocks
to timing the market.7 No December Tax Loss Selling equals
one minus the ratio of realized losses in December to both
realized and paper losses in December. Holds Tax-Deferred
Account is a dummy variable equal to one if the investor
holds an Individual Retirement Account (IRA) or Keogh
account at the brokerage. Stock Portfolio Beta, Size, Value,
and Momentum Factor loadings are computed with market
or four-factor regressions using monthly returns.
3. Data and summary statistics
Having outlined the behavioral proxies and control
variables that support our study of multiple dimensions of
investors’ mutual fund decisions, we now describe the
data sets needed for the empirical tests.
6
Options and short sale dummies could proxy for skill and experi-
ence, or they could reflect a tendency to speculate. See Campbell (2006)
on the correlation between investor sophistication and investment
mistakes.
7
For example, an informed investor could optimally focus on only a
few stocks (Goetzmann and Kumar, 2008; Ivković, Sialm, and
Weisbenner, 2008; Van Nieuwerburgh and Veldkamp, 2010).
6 W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27

Table 1
Summary statistics on mutual fund investments of individual investors.
This table summarizes the stock and mutual fund investment activities of our sample individual investors. The individual investor data are from a large
US discount brokerage house for the 1991–1996 period. The median numbers are indicated in parentheses. We identify a total of 136 index funds that
were available to our sample of investors during this time period. The Center for Research in Securities Prices (CRSP) universe of individual stocks
available during this time period is about 12,000.

Statistic Equity funds Index funds Stocks

Number of assets 1,492 33 10,877

Sample-period trades
Number of investors with trades 32,122 5,594 62,387
Number of buys 405,376 (67.03%) 15,354 (73.66%) 1,015,735 (54.76%)
Number of sells 199,365 (32.97%) 5,491 (26.34%) 839,041 (45.24%)
Mean (median) number of trades 19 (6) 4 (2) 30 (11)
Mean buy trade quantity 2,787 470 634
Mean buy trade size $9,929 $6,879 $11,251
Mean sell trade quantity 4,226 964 694
Mean sell trade size $15,744 $13,244 $13,684

End-of-month positions
Number of investors with positions 29,381 4,432 59,387
Mean (median) portfolio size $39,986 ($12,827) $13,659 ($5,200) $35,629 ($13,869)
Mean (median) number of assets 3.51 (2) 1.37 (1) 3.89 (3)

3.1. Data sources 3.2. Summary statistics

Our primary database is a 6-year (January 1991–
November 1996) panel of trades and monthly portfolio
positions of individual investors with accounts at a major
US discount broker.8 The database has been used by a
number of other authors including Odean (1998) and
Barber and Odean (2000). The database indicates the
end-of-month portfolios of all investors, records all trades
by these investors, and supplies demographic information
(measured as of June 1997 and supplied to the brokerage
house by Infobase) such as age, occupation, income, self-
reported net worth, gender, marital status, and zip code.9
We obtain the zip codes of the headquarters of a subset of
mutual fund families from Professors Josh Coval and
Zoran Ivković. We supplement this data set with addi-
tional information from the Lionshare database, 1996
Nelson’s Directory of Investment Managers, and Google
searches.
We also obtain data from several standard sources. For
each common stock and mutual fund in our sample, we
obtain monthly returns data from the Center for Research
in Security Prices (CRSP). We also use the CRSP mutual
fund database to obtain information on fund character-
istics such as the expense ratio and front-end load. Finally,
we obtain the monthly time series of the three Fama-
French factors and the momentum factor from Professor
Kenneth French’s data library.10
8
The brokerage firm has not made more recent data available. The
time period covered largely excludes such phenomena as exchange-traded
funds (ETFs) and high-frequency online day trading by individuals.
9
Each demographic variable is available for only a subset of the
investors in the sample. For instance, both age and income are available
for only 31,260 investors. Consequently, the number of observations in
each cross-sectional regression depends upon the subset of demographic
variables included.
10
The data library is available at http://mba.tuck.dartmouth.edu/
pages/faculty/ken.french/.
Table 1 provides summary statistics on individual inves-
tor trading and holding of mutual funds and, for compar-
ison, individual stocks. Sample investors traded or held
1,492 different equity mutual funds (of which 33 are index
funds) and close to 11,000 stocks. A total of 32,122 investors
have executed at least one mutual fund trade and 29,381
have held equity mutual funds at least once. Among these,
only 5,594 have executed at least one index fund trade and
4,432 have held index funds at least once. The balance of
buys and sells suggests that, in contrast to individual stocks,
mutual fund investors tend to buy and hold funds, rather
than buying and selling more actively as with individual
stocks. Trade sizes and quantities are typically modest.
The mean (median) number of equity funds in a typical
mutual fund portfolio is 3.51 (2.0) and number of trades
executed is 19 (6.0). The mean (median) number of index
funds held is 1.37 (1.0) and number of trades executed is 4
(2.0). In contrast, a typical investor holds 3.89 individual
stocks (median is three) and executes 30 (median is 11) stock
trades.
Beyond what is reported in the table, the proportion of
mutual funds in a typical equity portfolio that includes
mutual funds is 23.78%.11 This proportion increases
slightly with equity portfolio size to about 26% in the
highest size decile portfolios. The proportion of index
funds in the aggregate mutual fund portfolio is low,
varying between 5.30% and 8.39%, with a mean of only
6.54%. Nevertheless, among the investors who hold index
funds, the proportion of index funds in the mutual fund
portfolio is about 38%. Furthermore, there is much
11
If we include all investors, not just those who hold mutual funds,
this proportion is only 13.49%. Consistent with the common industry
trend, it has grown steadily from 7.63% in January 1991 to 16.58% in
November 1996. About 10% of all investors hold only mutual funds in
their equity portfolios while about 17% hold more than three-fourths in
equity mutual funds.
 W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27 7

Computations are based on 21,542 individuals who have traded individual stocks during the sample period. Any correlation coefficient with t-statistic greater than or equal to 2.576 is presented in bold type
evidence that our sample of brokerage records represents
typical US individual investors.12

DEnNo December DEn High

 0.009

 0.010
Income
In addition to detailed descriptions of each investor

0.481
0.121

0.031
0.023

0.444
0.016

0.012
0.006

0.009

1.000
characteristic variable, the appendix includes univariate
summary statistics on those variables.13 Features of the
data are noteworthy. For example, some of the behavioral
bias proxies are skewed to the left (Disposition Effect,

 0.008

 0.004
Narrow Framing) and others are skewed right with large

Selling

0.922
0.200

0.037
0.028

0.444
0.001
0.006
0.007

0.002
1.000
positive outliers (Lottery Stock Preference). The median age
of our sample investors is about 50 years, median income
is $87,500 per year, and median family size is two. Almost

Inattention
90% of the accounts are held by males. The average

Fund-Level

 0.012

 0.013
 0.002
 0.002
 0.001
(median) market risk-adjusted return on an investor’s

to indicate strong statistical significance. All series are winsorized at the 1% level, and results throughout the paper are very similar for winsorizing at the 5% level.

0.043

0.012
0.004
0.005

0.004

1.000
0.002
portfolio of individual stocks is an unflattering  0.378%
(  0.278%) per month and ranges from a minimum of
11.474% to a maximum of 6.437%. The median indivi-

Fund-Level
Local Bias
dual stock portfolio beta is a surprisingly high 1.157.

 0.024
 0.011

 0.013

 0.013
 0.006

 0.007

 0.004
 0.010
0.009

0.005

0.003

1.000
4. Empirical results

We begin by examining our behavioral bias and news

Macroeconomic
inattention proxies in more detail and, in particular, look for

Inattention to
intuition from the associations among these proxies and

 0.011
 0.010
 0.010

 0.008

 0.060

 0.008
 0.009
with other investor characteristics. Next, we study mutual

0.021

0.043
0.002

1.000

0.003
News
fund participation and fund selection decisions across our
sample investors. We then arrange information about these
decisions by type of fund, not by individuals. In these tests, Inattention
we examine the fees and expenses of funds chosen by the toEarnings

 0.065

 0.060
 0.004

 0.001
investors in our sample and whether there are associations
0.038
0.082

0.028
0.023
0.015

0.011

1.000

0.005
News

with turnover, performance, and behavioral biases. We also

investigate whether investors’ trend-chasing behavior is
Preference

influenced by their behavioral biases. Further tests sum-

 0.041

 0.065

 0.013
 0.002
Lottery

marize the impact of individual investors’ mutual fund

Stocks

0.044
0.081
0.062

 0.008 0.021

0.037
0.031
0.006

investment decisions on portfolio performance. Last, we 1.000

report the results of various robustness checks.
 0.039

 0.024
 0.041

 0.002
0.011
1.000
0.006
0.007

0.010

0.007
0.009
Local
Bias

4.1. Associations between investor characteristics

 0.004
Dummy

The recent behavioral finance literature has proposed a

0.019
0.012

0.016
0.008

1.000
0.010
0.006

0.002

0.009
0.004
0.006
Male

number of behavioral factors. However, previous papers

typically focus on only one behavioral factor. One of our
Overconfidence

contributions is to examine different behavioral factors

jointly and to measure how they relate to each other and
 0.039

 0.012
 0.010

 0.007
Dummy

to other investor characteristics.

0.080

0.019

0.062
0.013

0.015
1.000

0.001
0.006

Table 2 presents correlations among the behavioral

biases that we measure. A number of statistically signifi-
cant associations are evident. Disposition Effect, Narrow
Framing

 0.011
 0.010
Narrow
Cross-correlations of the behavioral measures.

0.230

0.080

0.081
0.082

0.200
0.121
0.012

Framing, Lottery Stocks Preference, and Inattention to Earn-

1.000

0.007

0.005

ings News often appear in the same individuals. These

individuals time their trades poorly, make decisions in
Disposition

isolation, buy speculative stocks, and ignore firm-specific

 0.011

 0.006
0.230

0.044
0.038

0.922
0.481
0.013
1.000

0.008
0.006

0.004
Effect

12
Ivković et al. (2005) find the distribution of stock holding periods
Lottery Stocks Preference

DEnNo December Selling

Macroeconomic News
Overconfidence Dummy

Inattention to Earnings

is very similar across our sample and the general population reflected in
Fund-Level Inattention
Fund-Level Local Bias

tax returns. Zhu (2005), Goetzmann and Kumar (2008), and Ivković,
Disposition Effect

Sialm and Weisbenner (2008) confirm that our sample closely resembles
DEnHigh Income
Narrow Framing

the general US individual investor population. Bailey, Kumar and Ng

Inattention to
Male Dummy

(2008) show similarities with the Census Bureau’s 1995 Survey of

Local Bias
Measure

Income and Program Participation and the Federal Reserve Board’s

News
Table 2

Survey of Consumer Finances of 1992 and 1995.

13
These statistics are computed prior to 1% winsorizing which is
employed throughout the balance of the paper.
8 W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27
information. Although uncorrelated with Disposition Effect,
Overconfidence Dummy is significantly positively corre-
lated with Narrow Framing, Male Dummy, and Lottery
Stocks Preference, suggesting a class of particularly aggres-
sive investors prone to speculation. Some correlations for
Local Bias suggest a cautious investor type (negative
correlation with Overconfidence Dummy and Lottery Stocks
Preference). Inattention to Macroeconomic News is nega-
tively correlated with Inattention to Earnings News, sug-
gesting that some individuals invest on a top down basis
and look at broad news, while ignoring firm-specific news.
To save space, we do not report correlations among the
other investor characteristics or between the behavioral
biases and the other characteristics (they are available
upon request). We summarize these correlations as fol-
lows. Many of the other investor characteristics are related
in sensible ways. For example, Age is positively correlated
with Marital Status, Retired Dummy, Investment Experience,
and Stock Portfolio Size. Income is positively correlated
with Family Size, Professional Dummy, and Financial Center
Dummy. The use of options or short sales is correlated with
Investment Experience and Financial Center Dummy. Finan-
cial sophistication is evident in correlations among Invest-
ment Experience, Options Dummy, Short Sale Dummy,
Stock Portfolio Diversification, and tax minimization.
A number of correlations are unexpected, such as no
association between Investment Experience and Stock Port-
folio Performance and negative association between Stock
Portfolio Diversification and Stock Portfolio Performance.
High loadings of individual stock portfolios on market,
size, value, and momentum factors are associated with
poor performance.
The (unreported) correlations between the behavioral
bias variables and the other investor characteristics begin
to suggest links between investment decision-making
biases and more fundamental individual characteristics.
For example, it is sensible that maturity and intelligence
(represented by Age, Income, Professional Dummy, and
Retired Dummy) are typically uncorrelated or even nega-
tively correlated with biases. Narrow Framing is more likely
for young, relatively low-income investors, which is con-
sistent with the findings of Kumar and Lim (2008). Lottery
stock preference is associated with growth and value
stocks [as proxied by SMB (small minus big) and HML
(high minus low) factor exposures] and poor performance.
Among the biases, only Local Bias is positively correlated
with Stock Portfolio Performance, suggesting that familiarity
bias is not necessarily detrimental. As we would predict
given its definition, Narrow Framing tends to be negatively
correlated with Stock Portfolio Diversification.
While it is difficult to comprehensively grasp hundreds
of individual cross correlations, some hint at effective
investing, some suggest cautious behavior, and many imply
that poor decision making leads to inferior stock portfolio
performance. To highlight these associations in a more
formal and dramatic manner, Table 3 presents the results
of factor analysis applied to the observed characteristics of
the 21,542 investors in the database who traded individual
stocks during the sample period.
The first factor explains 21.8% of the variance of
the investor characteristics. This factor has substantial
positive loadings on Disposition Effect, Narrow Framing,
and, especially, Lottery Stocks Preference. This suggests
that this factor reflects investors with substantial beha-
vioral biases, particularly a taste for risky stocks. We label
this factor Gambler. Negative loadings on Age, Income,
Professional Dummy, Retired Dummy, Investment Experi-
ence, and Portfolio Size suggest that Gambler is relatively
young, poor, unsophisticated, and inexperienced. The
negative loading on Stock Portfolio Diversification indicates
a tendency to plunge rather than spread risk. This is
consistent with models (Mitton and Vorkink, 2007;
Barberis and Huang, 2008) in which some investors take
undiversified positions in skewed securities that appeal to
their preferences. The loadings on risk factors indicate an
appetite for high beta stocks, small stocks, value stocks,
and trading against momentum. The negative loading on
Stock Portfolio Performance suggests that Gambler typi-
cally suffers poor performance. This is consistent with the
empirical finding in Kumar (2009) that investors with
high Lottery Stocks Preference often select small value
stocks that do not perform well.
The second factor explains 18.1% of the variation of the
investor characteristics. In contrast to Gambler, this factor
represents investors who seem to do everything right and
earn good returns from individual stocks as a consequence.
We label this factor Smart. Smart displays negative loadings
on several behavioral biases and has high income, profes-
sional status, and long investment experience. Smart’s
large, diverse individual stock portfolio has relatively mod-
est loadings on market, size, value, and momentum risks
and reflects the value of December tax loss selling. Among
the first five factors, Smart is the most likely to maintain a
tax-deferred brokerage account. This combination of good
characteristics yields relatively high individual stock port-
folio performance. Smart is likely to use short-selling,
implying sophistication in investment tactics.
The third factor explains 15.3% of the investor character-
istics and puts cumulative variance explained above 55%.
We label this factor Overconfident given the large positive
loading on Overconfidence Dummy (which, by construction,
is consistent with the large negative loading on Stock
Portfolio Performance). Overconfident is typically male,
inclined to Lottery Stocks Preference, single, not retired, and
inexperienced with investments. An association between
male gender and overconfident investing mirrors the find-
ings of Barber and Odean (2001). Overconfident’s individual
stock portfolio is poorly diversified and has a large loading
on market risk. The use of options is associated with this
ineffective decision maker, unlike the use of short sales
which is associated with the successful Smart investor.
The fourth factor explains 12.3% of the investor char-
acteristics. We label it Narrow Framer given its particu-
larly large loading on that bias. With significant positive
loadings on three biases, youth, and low income, poor
Stock Portfolio Diversification, and weak Stock Portfolio
Performance, Narrow Framer is reminiscent of the Gambler
and Overconfident stereotypes. Similar to the findings in
Kumar and Lim (2008), Narrow Framer exhibits stronger
disposition effect and hold less diversified portfolios.
Narrow Framer does seem aware of tax issues, given the
negative loading on No December Tax Loss Selling, perhaps
 W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27 9

Table 3
Factor analysis for the behavioral measures and other investor characteristics.
Computations are based on 21,542 individuals who have traded individual stocks during the sample period. The ‘‘varimax’’ method is run for ten
factors but only the first five are reported given variance explained.

Factor

Variable Gambler Smart Overconfident Narrow Framer Mature

Factor Characteristics
Eigenvalue 2.288 1.894 1.607 1.286 1.071
Variance explained 0.218 0.181 0.153 0.123 0.102
Cumulative variance explained 0.218 0.399 0.552 0.675 0.777

Factor Loadings
Disposition Effect 0.189  0.213 0.055 0.253  0.302
Narrow Framing 0.216  0.101 0.095 0.588  0.221
Overconfidence Dummy 0.055  0.058 0.472 0.090  0.232
Male Dummy 0.021 0.004 0.202  0.001  0.013
Local Bias  0.044  0.206  0.02 0.005  0.020
Lottery Stocks Preference 0.563  0.202 0.143  0.011  0.243
Inattention to Earnings News  0.058  0.011 0.090 0.196  0.013
Inattention to Macroeconomic News 0.029  0.007  0.052  0.011  0.008
Fund-Level Local Bias  0.020  0.033 0.000 0.032  0.016
Fund-Level Inattention 0.005  0.017 0.001  0.004  0.010
DEnNo December Tax Loss Selling 0.023  0.028 0.028 0.015  0.015
DEnHigh Income 0.028  0.027 0.037 0.022  0.019
Age  0.335 0.067  0.026  0.202 0.458
Income  0.404 0.020  0.005  0.167  0.126
High Income  0.027 0.196  0.010 0.004  0.085
Marital Status  0.032  0.033  0.255  0.001 0.054
Family Size 0.008  0.04  0.023  0.001  0.104
Professional Dummy  0.155 0.332  0.002 0.000  0.589
Retired Dummy  0.342 0.055  0.331 0.008 0.890
Investment Experience  0.333 0.509  0.221  0.015 0.292
Financial Center Dummy 0.045 0.005 0.032  0.007  0.059
Options Dummy 0.066 0.094 0.301 0.010  0.029
Short Sale Dummy 0.014 0.332 0.014 0.012  0.011
Stock Portfolio Diversification.  0.323 0.723  0.333  0.41 0.403
Stock Portfolio Size  0.202 0.407 0.080  0.303 0.552
Stock Portfolio Performance  0.454 0.354  0.828  0.236  0.020
No December Tax Loss Selling 0.006  0.498 0.088  0.398  0.311
Holds Tax-Deferred Account  0.004 0.202 0.027  0.005  0.311
Market Factor Exposure 0.471 0.091 0.556 0.220  0.046
SMB Factor Exposure 0.806 0.125 0.150  0.023  0.044
HML Factor Exposure 0.594 0.121 0.213  0.110 0.059
UMD Factor Exposure  0.555 0.087  0.045  0.072 0.010

because he or she carefully accounts for each stock, though
separately.
The fifth factor explains 10.2% of variance and, given that
it is the last factor with eigenvalue above one and puts
cumulative variance explained above 75%, it is the final
factor for which we offer detailed interpretation.14 Given
that this factor has a high loading on Age, Retired Dummy,
and Investment Experience, a negative loading on behavioral
biases, a large, well-diversified portfolio, and an under-
standing of tax-timing, we label it Mature. Unlike Smart,
Mature’s individual stock portfolio performance is not
extraordinary, but it successfully avoids the cost of obvious
biases and mistakes. Caution is also reflected in Mature’s
relatively modest loadings on market, size, value, and
momentum risks. Mature is less likely to hold a tax-deferred
account, perhaps because such accounts must be drawn
14
Given that we use factor analysis instead of principal compo-
nents, a cutoff of one for the eigenvalue is conservative. Information on
the sixth through tenth factors is unreported but available on request.
down upon approaching retirement or are less valuable to
relatively low income investors. Many of the characteristics
of Mature parallel what Korniotis and Kumar (2011) report
for older investors. To reconcile generally unbiased decision
making with mediocre performance, they suggest that aging
is associated with deterioration in cognitive skills
We recognize that the labels we have placed on the
first five factors are at best speculative. Nonetheless, the
clusters of characteristics they identify across tens of
thousands of individual US investors are intuitive. They
validate the behavioral biases and other investor char-
acteristics that the empirical behavioral finance literature
has developed. We employ these biases, and the factors
we have extracted, in subsequent tests to understand how
behavioral biases affect the use of equity mutual funds.
4.2. Participation in open end mutual funds: logit
regression estimates
Our next set of tests examines investors’ mutual fund
participation decisions. We estimate logit regressions in
10 W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27
which the dependent variable is the fund participation
dummy, which equals one for an investor who invests in
mutual funds at least once during the sample period. The
main independent variables of interest are the behavioral
bias proxies, inattention measures, and tax-related inter-
actives. The logit regression estimates are presented in
the first four specifications of Table 4. The independent
variables are standardized so that coefficient estimates
can be easily compared within and across specifications.15
In specifications 1 and 2 of Table 4, we explain the
mutual fund participation dummy with behavioral bias
proxies. Specification 2 also includes the control variables
previously described. Consistent with the presence of
behavioral biases, negative slopes on Disposition Effect,
Narrow Framing, Lottery Stocks Preference, and Inattention
to Earnings News indicate that investors who score high on
these characteristics are less likely to invest in equity
mutual funds. The negative slope on the interactive term
for Disposition Effect and No December Tax Loss Selling
indicates that investors prone to both the Disposition
Effect and no attention to tax issues are even less likely
to invest in equity mutual funds. Somewhat surprisingly,
we find that overconfident investors (that is, those who
trade stocks more frequently, yet earn lower returns) are
more likely to invest in mutual funds. This could reflect
overconfidence in their ability to identify good funds.16
In economic terms, the logit regression estimates indi-
cate that the propensity to invest in mutual funds declines
by 3.15% (0.126  25), 3.90%, 4.67%, and 0.95% when the
level of disposition effect, narrow framing, lottery prefer-
ence, or inattention to earnings news increases by one
standard deviation, respectively.17 The absolute size of slope
coefficients is the largest for Lottery Stocks Preference,
suggesting that the propensity to pick individual stocks is
most likely to divert investment away from sensible strate-
gies involving mutual funds. The finding for Lottery Stocks
Preference is particularly significant as, unlike some of our
other factors as discussed in Section 2.1, it is hard to
characterize this factor as anything other than behavioral
or, at best, skewness preference.
These findings are robust to the inclusion of the
control variables. Moreover, the estimated slopes on the
control variables are intuitive. We find that investors who
earn higher income, work as a professional, do not live
near a financial center, are sufficiently sophisticated to
use options, or who appear to value diversification in their
stock portfolios are also more likely to invest in mutual
funds. Those who ignore tax loss selling of their individual
stocks or load high on market, size, or value risks are less
likely to hold equity mutual funds.
Specifications 3 and 4 repeat the tests described pre-
viously but for the index fund participation dummy, which
is set to one only for those investors who invest in index
funds at least once during the sample period. The decision
to participate in index funds could be different from the
15
To alleviate concerns about multi-collinearity, we check the
variance inflation factor (VIF) for each explanatory variable.
16
Subsequent tests address this potentially puzzling finding.
17
Following Wooldridge (2003), we use a factor of 25% to interpret
the logit regression results.
decision to participate in mutual funds generally. The
evidence on behavioral biases and index funds in Specifi-
cations 3 and 4 largely echoes what we find for mutual
funds generally in Specifications 1 and 2. Investors who
score high on Disposition Effect, Narrow Framing, Inatten-
tion to Earnings News, and Disposition Effect interacted with
No December Tax Loss Selling are more likely to avoid index
funds. Once again, the importance of the propensity to
trade risky individual stocks is evident: The strong aver-
sion to mutual funds for those with Lottery Stocks Pre-
ference is heightened for index funds. The association
between overconfidence and mutual fund investment
disappears, perhaps indicating that overconfident inves-
tors confine themselves to actively managed funds.
Again, these findings are robust to the inclusion of the
control variables. The estimates of the coefficients on the
control variables also suggest that older investors, higher
income investors, those with smaller stock portfolios,
those who appear to value diversification, those who
are cognizant of tax issues, those who do not live near
a financial center, and those who avoid individual stocks
with high loadings on market and size risks are
more likely to value index funds. Thus, the clientele
of index funds differs somewhat from the clientele of
other mutual funds. However, behavioral biases appear to
have a significant influence on the use of equity mutual
funds regardless of type. In the following sections, we
conduct additional tests to refine and extend these
findings.
4.3. Extent of fund investment: cross-sectional
regression estimates
In our third set of tests, we estimate cross-sectional
regressions with portfolio weights in mutual funds as
dependent variables. Similar to the participation regres-
sions, the independent variables are the behavioral factors
that we focus on, plus control variables. One concern in
such regressions is that the cross-correlation of individuals
in decision making could inflate the statistical significance
of our regressions. For instance, some segment of investors
could select very similar portfolios of funds and have
correlated preferences for active, small cap, and industry
funds. As a result, their fund choices could be correlated.
We take the following steps to address such concerns
for each of our cross-sectional regressions. First, clustered
standard errors are intended to correct for correlation of
residuals within each cluster (Petersen, 2009), though this
method assumes independence across groups.18
We do not know the exact nature of any cross-
sectional dependence of returns residuals. Therefore, we
try two different forms of clustered standard errors, by
zip code (treating each investor within a zip code as
one observation) and by peer group (same quintile of
portfolio size, trading frequency, and number of stocks).19
18
Kumar (2009) uses a similar method to account for potential
cross-sectional dependence in performance across investors.
19
The results with peer group-clustered standard errors are very
similar. For brevity, we report the results with zip code-clustered standard
errors only.
Table 4
Investor characteristics and mutual fund participation decisions and stock versus funds allocation
The first four specifications in the table are logit regressions. In Specifications 1 and 2, the dependent variable is one for investors who hold or trade mutual funds at least once during the sample period. In
Specifications 3 and 4, the dependent variable in the logit regression is one for investors who hold or trade index funds at least once during the sample period. Specifications 5 and 6 are cross-sectional
regression estimates in which the proportion of mutual funds in the equity portfolio is the dependent variable. In Specification 5, the dependent variable is the mean weight of mutual funds in the total equity
(stocks and mutual funds) portfolio. In Specification 6, the dependent variable is the mean weight of index funds only. The dependent variable is multiplied by one hundred. Independent variables are defined in
Appendix A, and a constant term is included. They are standardized so coefficients can be compared within or across specifications. There is one observation per investor. An intercept is included but not
reported. Robust zip code clustered standard errors are used to obtain the t-statistics. The statistically significant coefficient estimates are indicated in bold font. The individual investor data are from a large US
discount brokerage house for the 1991–1996 period.

Mutual fund participation dummy (LOGIT) Mutual fund portfolio weight

All mutual funds Index funds only Mutual fund weight Index fund weight

(1) (2) (3) (4) (5) (6)

W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27

Independent Variable Coefficient z-value Coefficient z-value Coefficient z-value Coefficient z-value Coefficient t-statistic Coefficient t-statistic

Behavioral Bias Proxies

Disposition Effect  0.126  3.37  0.092  2.78  0.106  3.12  0.096  2.67  1.081  3.11  0.569  1.77
Narrow Framing  0.156  5.91  0.106  4.39  0.104  4.54  0.092  3.67  1.936  7.95  1.122  3.36
Overconfidence Dummy 0.057 2.19 0.060 3.30  0.005  0.63  0.004  0.62 0.790 3.67  0.800  2.22
Male Dummy 0.017 1.04  0.017  0.52  0.032  1.38  0.016  1.11 0.288 1.35  0.311  0.74
Local Bias  0.014  1.16  0.014  1.31  0.013  0.41  0.014  0.33  0.242  1.01  0.172  1.13
Lottery Stocks Preference  0.187  8.91  0.170  6.29  0.239  10.14  0.230  9.10  1.319  5.35  0.911  3.04
Inattention to Earnings News  0.038  2.17  0.044  2.11  0.047  2.49  0.057  2.11  0.580  2.30  0.690  2.55
Inattention to Macroeconomic News  0.019  1.18  0.013  1.09  0.014  1.14  0.013  1.03  0.452  1.78  0.206  1.42
DEnHigh Income  0.021  1.73  0.018  1.68  0.014  1.42  0.013  1.21  0.401  1.60  0.388  1.66
DEnNo December Tax Loss Selling  0.091  2.98  0.081  2.11  0.074  3.14  0.069  2.84  0.327  3.10  0.430  2.74

Control Variables
Age 0.022 1.19 0.186 4.01 0.488 1.60 1.355 3.25
Income 0.035 2.26 0.046 1.77 0.767 2.60 0.838 2.18
High Income Dummy 0.050 2.90 0.084 3.01 0.588 2.11 0.438 2.18
Marital Status 0.006 1.44 0.021 1.30 0.727 2.01  0.101  0.43
Family Size 0.024 0.70 0.003 0.31  0.208  0.70  0.055  0.22
Professional Dummy 0.032 1.99 0.030 1.20 0.454 1.86  0.200  1.11
Retired Dummy  0.009  0.22 0.028 1.55  0.071  0.41 1.011 2.91
Investment Experience 0.029 1.51 0.028 1.40 0.122 0.40 0.533 3.01
Financial Center Dummy  0.084  3.98  0.067  2.11  1.034  3.44  0.960  3.11
Options Dummy 0.066 3.01 0.016 1.11 0.101 1.53  0.188  0.76
Short Sale Dummy 0.033 1.17 0.025 1.55 0.717 2.01  0.142  0.61
Stock Portfolio Diversification 0.158 6.80 0.273 7.16 0.940 3.11 0.767 3.30
Stock Portfolio Size  0.022  0.98  0.160  2.11  1.399  10.02  0.594  2.55
Stock Portfolio Performance 0.035 1.70 0.020 1.40 0.105 0.36  0.409  2.21
No Dec Tax Loss Selling  0.047  2.52  0.036  1.95  1.013  2.06  1.322  3.44
Holds Tax-Deferred Account 0.135 9.08 0.105 7.11 2.452 7.46 0.650 2.29
Market Factor Exposure  0.041  2.60  0.031  3.01  0.980  2.93  0.148  1.70
SMB Factor Exposure  0.168  5.91  0.055  4.53  0.937  3.72  0.242  1.77
HML Factor Exposure  0.038  2.27  0.009  1.20  0.392  2.93  0.375  2.19
UMD Factor Exposure  0.017  1.68  0.010  2.09  0.462  2.09  0.400  2.13

Pseudo R2 0.038 0.092 0.027 0.074 0.104 0.126

Number of Observations 22,984 21,542 22,984 21,542 21,542 21,542

11
12 W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27
Second, we construct risk-adjusted returns to remove the
market-wide movement in returns that is common to all
investors.
Specifications 5 and 6 of Table 4 present the regression
estimates. In Specification 5, the dependent variable is the
mean weight assigned to mutual funds in an investor’s
equity portfolio. The results parallel the findings from the
participation regressions reported in Table 3. Individuals
who score high on Disposition Effect, Narrow Framing,
Lottery Stocks Preference, Inattention to Earnings News, or
interaction between Disposition Effect and No December Tax
Loss Selling typically put a smaller fraction of their portfo-
lio in mutual funds, while overconfident investors typi-
cally allocate a larger proportion of their equity portfolio
to mutual funds. In economic terms, a one standard
deviation increase in narrow framing propensity is asso-
ciated with a 1.94% lower allocation to mutual funds. The
estimates of other statistically significant behavioral bias
proxies are also economically significant. The estimates for
the coefficients on the control variables show that inves-
tors who have higher income, are married, do not live near
a financial center, understand short selling and diversifi-
cation, have relatively small stock portfolios, understand
tax issues, and have relatively low loadings on risk factors
in their stock portfolios typically hold a higher proportion
in mutual funds. Thus, similar forces drive the decision to
participate in mutual funds and the extent of that
participation.
In Specification 6, the dependent variable is the mean
weight assigned to index funds. The cross-sectional
regression results with index fund weight reinforce the
findings from the index fund participation regressions.
Investors with stronger behavioral biases typically allo-
cate a smaller proportion of their equity portfolio to index
funds, although the effect of overconfidence flips between
Specifications 5 and 6. Even though overconfident inves-
tors allocate a slightly larger weight to mutual funds, they
allocate a smaller proportion of their equity portfolio to
index funds. Thus, such investors focus more on actively
managed funds. The extent to which index funds are
held goes up as individual stock portfolio performance
goes down.
4.4. Behavioral biases and preference for certain types of
mutual funds
To better understand investor preferences for different
types of funds, we examine three additional characteris-
tics of investors’ mutual fund portfolios. Table 5, Panel A
presents the cross-sectional estimates. In Specifications
1–3, the dependent variable is the mean expense ratio,
the mean front-end load, and the mean fund turnover,
respectively, for each individual’s mutual fund portfolio.
Specification 1 shows that investors with stronger Dis-
position Effect, Narrow Framing, Overconfidence Dummy,
Lottery Stocks Preference, Inattention to Earnings News, and
interaction between Disposition Effect and No December
Tax Loss Selling tend to select mutual funds with higher
expense ratios. Specification 2 examines front-end loads
and confirms that the same set of biases that drive
investors to higher expense funds is also associated with
choosing mutual funds with higher front end loads.
Specification 3 shows that individuals who are overconfi-
dent, male, have lottery stocks preference, display inat-
tention to earnings news, and have positive loading on
measures of particularly severe disposition effect (Dispo-
sition EffectnHigh Income and Disposition EffectnNo Decem-
ber Tax Loss Selling) tend to invest in funds with higher
turnover.
If we assume that funds with higher expense ratios,
higher front-end loads, and high levels of turnover are
poor choices, our evidence indicates that investors who
demonstrate poor decision making with individual stocks
also appear to make poor decisions about mutual funds.
The slope coefficients on behavioral factors in Specifica-
tion 2 are particularly large, suggesting that behavioral
biases are important in driving investors into high front
end load funds. The slope coefficients on the control
variables indicate that younger, poorer, less experienced,
and less tax-savvy investors are more likely to elect these
apparently poor choices.
4.5. A closer look at fund-level local bias and inattention
Why do some investors go against common wisdom
and hold high front-end load funds? One possibility is
that they are unaware of the load.20 Alternatively, some
investors could be more willing to pay a high load for
funds they are familiar with. In particular, they could have
more awareness of funds headquartered in their geo-
graphic area, perhaps due to localized marketing efforts.21
As a result, they are willing to pay high fees for such
funds. To investigate this thesis, we test whether inves-
tors with high Fund-Level Local Bias are more likely to hold
funds with high fees and expenses. Having employed
proxies for local bias and inattention to news based on
trading of individual stocks, we also investigate whether
some investors concentrate their equity mutual fund
trades around news. In Table 5, Panel B we introduce
our Fund-Level Local Bias measure into the cross-sectional
regression specification. This variable is distinct from
individual equity local bias in that it measures the
geographical proximity between an investor’s home and
the headquarters of mutual funds held by the investor,
not the proximity of the headquarters of an individual
listed company. We also introduce Fund-Level Inattention
to the cross sectional regressions. This variable measures
each individual’s propensity to trade mutual funds around
macroeconomic news events as 1  (number of mutual
fund trades around the event)/(total number of mutual
fund trades).
The estimates in Specifications 1–3 show that inves-
tors with stronger Fund-Level Local Bias tend to select
mutual funds with higher expense ratios, front end loads,
and turnover, even after controlling for other behavioral
20
See Capon, Fitzsimons and Prince (1996) for survey evidence that
about 39% of mutual fund investors were unaware of the load charged
by the funds they held.
21
Starks and Yates (2008) investigate a related familiarity-based
hypothesis and find that individuals often cluster their choice of funds
within the same family of funds.
 W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27 13

Table 5
Characteristics of investors and the funds they select.
This table reports cross-sectional regression estimates in which three different mutual fund portfolio characteristics are employed as dependent
variables. In Panel A, Specifications 1–3, the mean expense ratio, the mean front-end load, and the mean turnover of the funds in the mutual fund
portfolio is the dependent variable, respectively. In all specifications, the dependent variable is multiplied by one hundred. There is one observation per
investor. Independent variables are defined in Appendix A, and an intercept term is included but not reported. In Panel B, we consider two additional
independent variables. Zip code clustered standard errors are used to obtain the t-statistics. The statistically significant coefficient estimates are indicated
in bold font. There is one observation per individual.

(1) Expense ratio (2) Front-end load (3) Fund turnover

Independent Variable Coefficient t-statistic Coefficient t-statistic Coefficient t-statistic

Panel A: Mutual fund portfolio characteristic regression estimates

Behavioral Bias Proxies
Disposition Effect 0.012 3.02 0.033 3.11 0.004 0.55
Narrow Framing 0.019 3.55 0.041 2.42 0.004 1.01
Overconfidence Dummy 0.020 3.11 0.029 2.50 0.022 2.67
Male Dummy 0.005 1.05 0.012 1.22 0.018 2.19
Local Bias 0.003 0.18 0.021 1.70  0.009  1.40
Lottery Stocks Preference 0.024 3.95 0.033 2.29 0.017 2.66
Inattention to Earnings News 0.013 2.33 0.022 2.65 0.019 2.08
Inattention to Macroeconomic News 0.005 1.13 0.017 1.54 0.003 0.34
DEnHigh Income 0.007 1.60 0.011 1.69 0.021 2.80
DEnNo December Tax Loss Selling 0.024 3.60 0.026 2.44 0.025 3.51

Control Variables
Age  0.014  2.30  0.030  1.65  0.037  2.98
Income 0.007 1.51 0.011 1.00 0.023 1.71
High Income Dummy 0.003 0.90 0.015 0.69  0.034  2.30
Marital Status  0.005  1.70  0.008  0.50 0.005 0.55
Family Size 0.004 0.80 0.012 1.01 0.015 0.70
Professional Dummy 0.007 1.11 0.024 1.22  0.021  2.05
Retired Dummy  0.015  2.30 0.012 0.56  0.017  1.81
Investment Experience  0.014  2.59  0.025  2.51  0.033  3.00
Financial Center Dummy  0.008  1.41  0.004  1.22  0.027  2.67
Options Dummy 0.002 0.35 0.012 1.33 0.019 2.75
Short Sale Dummy  0.003  1.13  0.014  0.99 0.013 1.99
Stock Portfolio Diversification  0.001  0.11 0.003 0.90 0.013 1.09
Stock Portfolio Size 0.001 0.17 0.008 0.45 0.005 0.60
Stock Portfolio Performance  0.006  1.54  0.004  0.26 0.009 0.91
No December Tax Loss Selling 0.015 2.52 0.031 2.89 0.034 2.99
Holds Tax-Deferred Account  0.022  4.81  0.013  3.53  0.020  3.86
Market Factor Exposure 0.010 2.56 0.016 2.65 0.022 2.97
SMB Factor Exposure 0.018 3.17 0.012 2.26 0.024 3.39
HML Factor Exposure 0.003 0.93 0.012 2.39 0.001 0.23
UMD Factor Exposure 0.019 3.72 0.024 3.34 0.031 3.52

Adjusted R2 0.071 0.054 0.066

Number of Observations 21,542 21,542 21,542

Panel B: Regression estimates with the fund-level local bias and inattentiveness measures
Behavioral Bias Proxies
Disposition Effect 0.013 2.99 0.032 3.07 0.002 0.21
Narrow Framing 0.016 3.44 0.045 2.44 0.003 0.50
Overconfidence Dummy 0.018 3.24 0.025 2.32 0.022 2.43
Male Dummy 0.004 0.87 0.012 1.21 0.016 2.31
Local Bias 0.004 0.29 0.020 1.68  0.011  1.52
Lottery Stocks Preference 0.022 4.12 0.028 2.49 0.017 2.74
Inattention to Earnings News 0.011 2.19 0.022 2.49 0.015 2.58
Inattention to Macroeconomic News 0.008 1.85 0.019 2.68 0.002 0.22
DEnHigh Income 0.007 1.63 0.016 2.03 0.017 2.29
DEnNo December Tax Loss Selling 0.022 3.49 0.022 2.36 0.023 3.44

Fund-level bias proxies

Fund-Level Local Bias 0.024 5.43 0.050 3.59 0.036 4.65
Fund-Level Inattention to Macro News 0.018 2.37 0.017 2.11 0.002 0.54

Control Variables
Age  0.016  2.42  0.028  1.33  0.034  2.03
Income 0.007 1.23 0.011 1.05 0.021 1.60
High Income Dummy 0.003 0.50 0.015 0.65  0.030  2.13
Marital Status  0.006  1.70  0.007  0.70 0.005 0.51
Family Size 0.005 1.02 0.018 1.03 0.014 0.74
Professional Dummy 0.005 1.06 0.017 0.98  0.025  2.05
Retired Dummy  0.014  1.93 0.011 0.55  0.018  1.83
14 W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27

Table 5 (continued )

(1) Expense ratio (2) Front-end load (3) Fund turnover

Independent Variable Coefficient t-statistic Coefficient t-statistic Coefficient t-statistic

Investment Experience  0.015  2.61  0.016  2.12  0.025  2.62

Financial Center Dummy  0.004  1.06  0.005  1.35  0.024  2.63
Options Dummy 0.002 0.30 0.011 1.35 0.021 3.22
Short Sale Dummy  0.008  1.53  0.018  1.39 0.013 2.02
Stock Portfolio Diversification 0.004 0.76 0.004 0.91 0.011 1.06
Stock Portfolio Size 0.002 0.38 0.011 1.01 0.007 0.60
Stock Portfolio Performance  0.008  1.51  0.007  0.30 0.008 0.74
No December Tax Loss Selling 0.013 2.33 0.030 2.80 0.029 2.71
Holds Tax-Deferred Account  0.020  4.71  0.012  3.33  0.021  3.67
Market Factor Exposure 0.011 2.55 0.015 2.78 0.023 2.73
SMB Factor Exposure 0.018 3.11 0.012 2.21 0.023 3.32
HML Factor Exposure 0.003 0.90 0.013 2.43 0.001 0.21
UMD Factor Exposure 0.021 3.70 0.026 3.54 0.030 3.50

Adjusted R2 0.072 0.056 0.069

Number of Observations 21,542 21,542 21,542

biases. Indeed, Fund-Level Local Bias emerges as the vari-
able with the largest economic and statistical significance
compared with all other behavioral biases. Intriguingly,
further correlation analysis (unreported but available
upon request) shows that Fund-Level Local Bias is nega-
tively correlated with age and positively correlated with
Retired Dummy and Stock Portfolio Size. This again suggests
localized marketing efforts: Older investors are typically
cleverer and avoid Fund-Level Local Bias, but retired
investors with large portfolios could be subjected to
recommendations or marketing efforts from brokers,
bankers, and social peers.
Thus, investors who exhibit a stronger preference to
hold local funds, which could be thought of as a famil-
iarity effect, are more likely to buy funds with high fees,
expenses, and turnover. Furthermore, Fund-Level Inatten-
tion is positive and significant in two of the three
specifications, those for expense ratios and front end
loads. Investors who pay less attention to news seem to
select funds that impose higher expenses and loads on
themselves. These findings suggest that behavioral biases
can combine with ignorance to yield costly suboptimal
mutual fund investment decisions.
4.6. Behavioral biases and trend chasing behavior
Our next set of tests examines whether behavioral
biases also play an important role in explaining individual
investors’ trend-chasing behavior. Many explanations
have previously been proposed for this robust pattern
observed in mutual fund flow data. Chevalier and Ellison
(1997) show that agency problems induce fund managers
to alter the riskiness of the fund to maximize investment
flows instead of risk-adjusted expected returns. Sirri and
Tufano (1998) and Gruber (1996) propose that investors
infer managerial skill from past returns. Berk and Green
(2004) feature investors who infer managerial skill from
past returns and, therefore, chase returns. However, fund
managers facing decreasing returns to scale in their active
portfolios no longer outperform the index when more
funds flow in, and, as a consequence, past performance
does not predict future returns. Instead of analyzing
aggregate flows, our data allow us to study the relation
between behavioral tendencies and trend-chasing beha-
vior at the individual investor level.
Table 6 examines trend chasing in individual mutual
fund portfolios. For each mutual fund purchase, we
compute the return prior to the purchase, which is then
averaged for each individual. Specification 1 uses 1-year
past returns as dependent variable, and Specification 2
uses the 2-year past returns. The results from both
specifications show that investors with certain behavioral
biases, or inattention to macro news, tend to buy funds
with more positive recent returns. Although the disposi-
tion effect does not seem to be associated with trend
chasing, the coefficients on the Disposition EffectnHigh
Income and Disposition EffectnNo December Tax Loss Selling
are strongly significantly positive. Among the coefficients
on the control variables, some evidence shows that
sophisticated investors (those who are professionals, live
near a financial center, trade options, or have well-
diversified, well-performing individual stock portfolios)
are less likely to engage in trend chasing. As was found
previously (Table 5) for the propensity to select high-cost
mutual funds, the size of slope coefficients suggest that
Overconfidence Dummy and Lottery Stocks Preference are
among the strongest predictors of whether a particular
investor will trend-chase with mutual funds.
This evidence suggests that trend chasing is not a
rational strategy. This interpretation is supported by the
empirical results of previous authors concerning mutual
fund flows and subsequent returns on individual stocks
held by the funds. Frazzini and Lamont (2008) find
relatively poor monthly returns on portfolios of individual
stocks held disproportionately heavily by mutual funds
that experience high inflows over the previous 6 months
to 3 years. We find that it is more behaviorally biased
individuals who are responsible for trend-chasing inflows.
Thus, some of what they describe as the ‘‘dumb money’’
effect must be ascribed to a subset of investors who we
have also identified as making poor decisions with their
individual stock portfolios.
 W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27 15

Table 6
Returns chasing and fund selection.
This table reports cross-sectional regression estimates with two different mutual fund portfolio performance measures as dependent variables, the
12-month past return and the 24-month past return. There is one observation per investor. The independent variables include behavioral bias proxies,
control variables, and an intercept term that is included but unreported. Independent variables are defined in Appendix A. Investors with fewer than 12
months of data are excluded. Zip code clustered standard errors are used to obtain the t-statistics. The statistically significant coefficient estimates are
indicated in bold font. The individual investor data are from a large US discount brokerage house for the 1991–1996 period.

(1) 12-Month past return (2) 24-Month past return

Independent Variable Coefficient t-statistic Coefficient t-statistic

Behavioral Bias Proxies

Disposition Effect  0.022  0.25 0.087 0.34
Narrow Framing 0.644 4.35 0.764 3.45
Overconfidence Dummy 1.370 5.04 1.604 6.87
Male Dummy 0.062 0.46 0.258 2.51
Local Bias 0.154 1.09 0.034 0.33
Lottery Stocks Preference 0.978 6.39 1.196 5.75
Inattention to Earnings News 0.199 1.62 0.291 1.85
Inattention to Macroeconomic News 0.581 2.18 0.492 2.84
DEnHigh Income 0.353 2.05 0.508 2.57
DEnNo December Tax Loss Selling 0.480 2.16 0.390 2.06

Control Variables
Age  0.329  1.66  0.886  2.11
Income  0.427  1.83  0.542  1.62
High Income Dummy  0.061  0.58  0.196  1.49
Marital Status  0.077  0.81 0.443 1.52
Family Size  0.149  1.22  0.609  1.76
Professional Dummy  0.629  2.32  1.052  2.92
Retired Dummy  0.487  2.91  0.152  1.92
Investment Experience 0.057 0.30  0.468  1.98
Financial Center Dummy  0.404  2.13  0.510  1.63
Options Dummy  0.347  2.71  0.492  2.63
Short Sale Dummy  0.024  0.12 0.070 0.46
Stock Portfolio Diversification  0.093  0.46  0.492  2.02
Stock Portfolio Size  0.139  0.68  0.103  0.71
Stock Portfolio Performance  0.558  3.46  0.768  2.13
No December Tax Loss Selling 0.380 1.92 0.407 2.93
Holds Tax-Deferred Account  0.062  0.61  0.168  2.38
Market Factor Exposure 0.862 3.87 0.565 3.54
SMB Factor Exposure 0.393 2.64 0.485 3.82
HML Factor Exposure 0.068 0.67 0.151 2.15
UMD Factor Exposure 0.228 2.40 0.264 2.51

Adjusted R2 0.091 0.076

Number of Observations 21,542 21,542

The disposition effect result merits further discussion.
In the classic form of this bias, investors sell well-
performing individual stocks too quickly and hold poor-
performing stocks too long. Trend chasing by individuals
who invest in mutual funds is broadly contradictory to a
disposition effect in individual stocks: Trend-chasers seek
and then hold good performers, instead of selling them
quickly. Our disposition effect interactive terms isolate
investors who display a disposition effect that is likely to
be particularly severe, and both terms earn a strongly
significantly positive slope coefficient in the regressions
of Table 6. Thus, individuals who display particularly
damaging forms of the disposition effect in their indivi-
dual stock portfolios tend to contradict themselves by
displaying trend chasing in their mutual fund choices.
This implies that behavioral biases do not just vary across
individuals but also across the components within a
particular investor’s portfolio, with professionally mana-
ged assets handled in a radically different manner than
individual stocks. This could be consistent with the idea
that investors decompose their portfolios into layers that
serve different purposes (Shefrin and Statman, 2000).
Overall, our cross-sectional regression estimates
reported in Tables 4–6 confirm that investors who are
more behaviorally biased on any of several dimensions or
do not pay attention to salient news are more likely to
display poor mutual fund investment decisions. They
typically have a greater proportion of their equity invest-
ment in individual stocks, not mutual funds, suggesting
that they do not value diversification. When they buy
funds, they prefer actively managed funds to index funds,
tend to buy funds with high fees and loads, and chase
funds with high recent returns. The strength of one of our
simplest behavioral bias measures, Lottery Stocks Prefer-
ence, is particularly compelling.
The missing link in our evidence and interpretations to
this point is more explicit evidence on performance.
While it appears that behavioral biases and ignoring news
lead to poor choices, we must also show the consequences
for performance. For example, individual investors
16 W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27
typically avoid high front-end load funds (Barber, Odean
and Zheng, 2005), but some investors could be able to
discriminate between good and bad quality front-end
load funds and enjoy superior portfolio performance from
those high load funds that they do elect to hold. Thus, our
next task is to examine the performance of investors’
mutual fund portfolios.
4.7. Performance of mutual fund portfolios
We again estimate cross-sectional regressions with the
same behavioral proxies and controls as explanatory
variables. Table 7, Panel A studies mutual fund perfor-
mance for each investor’s actual holdings. The dependent
variables are four measures of the sample period perfor-
mance of each investor’s mutual fund portfolio, the raw
performance measure (mean monthly portfolio return),
the net-of-expenses performance measure (the net
monthly return), the Sharpe ratio, and the market model
alpha. We again use zip code clustered standard errors to
compute the t-statistics because performance estimates
are unlikely to be independent.22
Specification 1 explains the mean monthly return. Dis-
position Effect, Narrow Framing, Overconfidence Dummy,
Lottery Stock Preference, and both measures of inattention
to news are associated with lower performance. For exam-
ple, mean monthly return is lower by  0.041 per month
for each standard deviation of increase in narrow framing.
Because the highest and lowest quintiles of narrow framing
differ by 4.3 standard deviations, this implies a 2.12% per
year lower return for highest quintile narrow framing
investors compared with those in the lowest quintile.
Similarly, highest quintile disposition effect investors have
returns 1.34% lower than those in the lowest quintile.23
Thus, our behavioral proxies detect poor decision-making
skills that reduce portfolio performance.
Among the control variables, investment experience is
significant, and the positive slope makes sense. The use of
options or short sales is associated with better mutual
fund performance, which is consistent with those vari-
ables reflecting skill or financial sophistication. Specifica-
tion (2) examines net monthly returns and shows similar
associations between behavioral biases and performance.
Specification 3 examines the Sharpe ratio. We again
find broadly similar associations with the behavioral bias
proxies, inattention measures, and control variables.
Narrow Framing, Overconfidence Dummy, and, to a lesser
extent, Disposition Effect are associated with lower per-
formance. Results are similar when we account for poten-
tial cross-sectional dependence in performance induced
by market-wide factors and consider a risk-adjusted
performance measure as the dependent variable (Specifi-
cation 4). Collectively, the evidence in Table 7, Panel A
shows that behavioral biases measured from individual
stock selection are also associated with lower raw and
22
As before, other forms of standard error clustering yield very
similar results.
23
Given that the highest and lowest quintiles of disposition effect
differ by 4.13 standard deviations, their yearly performance difference is
1.34% (  0.027% times 12 times 4.13).
risk-adjusted returns from mutual funds. Thus, poor
decision making in one domain appears to spill over into
the performance experienced with other classes of
investments.
While Table 7, Panel A describes the actual realized
returns of individual investors based on their total hold-
ings at the end of each month, Panel B studies perfor-
mance based on investor trades under both actual and
hypothetical holding periods computed using daily fund
returns data from Morningstar.24 Specifications 1 and 2
study actual holding period returns from trades. They
confirm that investors with higher values on most of our
behavioral bias proxies and inattention to news measures
have significantly lower holding period returns and
shorter holding period, in contrast to the buy-and-hold
strategies prescribed by standard portfolio theory. Local
Bias is associated with longer holding periods. Correlation
analysis (unreported but available upon request) indicates
that Local Bias is associated with poor diversification and
mediocre performance in the individual stock portfolio,
but Specification 2 shows us that it could also yield
sensible low turnover of mutual fund holdings.
Specifications 3 and 4 adopt the alternative viewpoint
of returns based on actual trades but standardized
hypothetical holding periods. Following Odean (1999)
and Kumar and Lee (2006), we calculate the subsequent
k-month returns following each buy trade averaged over
the trading history of an individual and subtract the
subsequent k-month returns following each sell trade
averaged over the trading history. The summary statistics
on 1- and 12-month post-trade buy–sell return differen-
tials show that investors who score high on most of our
behavioral and inattention proxies have lower post-trade
buy–sell returns differentials. In other words, investors
with strong behavioral biases tend to time their buys and
sells poorly, and they experience inferior performance
relative to less-biased investors. The results are especially
significant for 12-month returns differentials.
Table 8 features interactions between investor portfo-
lio characteristics and fund characteristics to explain
performance. Individual household mutual fund perfor-
mance is regressed on the behavioral biases and inatten-
tion measures previously employed, characteristics of the
individual’s mutual fund portfolio (the weight of
the portfolio held in mutual funds, and the averages of
the expense ratio, 12-B-1 fee, and front-end load on
the funds held), interactive terms that combine beha-
vioral and portfolio characteristics, and (unreported)
control variables.
The results confirm the negative impact of disposition
effect, narrow framing, overconfidence, lottery stocks
preference, and inattention to news on performance as
documented previously. Among the mutual fund portfolio
characteristics, investors with higher weight on mutual
funds tend to enjoy superior fund performance, which is
consistent with classic notions of portfolio management.
24
Partial sales are excluded from our calculations. Unlike Panel A,
these calculations exclude any funds that were held prior to the start of
our sample period.
 W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27 17

Table 7
Investor characteristics and performance of mutual fund investments.
This table reports cross-sectional regression estimates to explain two measures of mutual fund portfolio performance, position-based performance
measures in Panel A and trade-based performance measures in Panel B. In Panel A, the dependent variables are (1) the mean monthly percent return (in
percentage terms), (2) the net monthly return which equals the mean monthly return minus expenses (but not loads), (3) the Sharpe ratio of net returns
multiplied by one hundred, and (4) the monthly market model alpha. In Panel B, the dependent variables in Specifications 1 to 4 are the mean annualized
holding period return, the mean holding period, the one-month post trade buy–sell return differential, and the 12-month post trade buy–sell return
differential (PTBSD), respectively. Independent variables are defined in appendix. A constant term is included. Investors with fewer than 12 months of
data are excluded. Zip code clustered standard errors are used to obtain the t-statistics. The statistically significant coefficient estimates are indicated in
bold font. The individual investor data are from a large US discount brokerage house from 1991 to 1996.

Panel A: Position-Based Mutual Fund Portfolio Performance Regression Estimates

(1) Mean monthly returns (2) Net monthly returns (3) Net Sharpe ratio  100 (4) Market model alpha

Independent Variable Coefficient t-statistic Coefficient t-statistic Coefficient t-statistic Coefficient t-statistic

Behavioral Bias Proxies

Disposition Effect  0.027  2.14  0.028  2.16  0.554  1.94  0.027  1.96
Narrow Framing  0.041  2.94  0.047  2.75  1.550  3.83  0.050  2.65
Overconfidence Dummy  0.025  2.17  0.031  2.60  1.502  2.39  0.033  2.06
Male Dummy  0.009  1.05  0.012  1.42  1.503  1.90  0.039  2.29
Local Bias 0.010 1.20 0.010 1.30 0.113 0.42 0.006 0.88
Lottery Stocks Preference  0.026  2.99  0.024  2.78  1.249  1.97  0.059  3.26
Inattention to Earnings News  0.014  2.18  0.015  2.48  1.041  2.13  0.026  2.82
Inattention to Macroeconomic News  0.022  2.22  0.024  2.45  1.010  2.03  0.019  1.92
DEnHigh Income  0.009  1.26  0.012  1.26 0.143 0.19 0.006 0.80
DEnNo December Tax Loss Selling  0.016  1.66  0.016  1.62  0.155  0.51  0.028  2.58

Control Variables
Age  0.007  1.59  0.008  1.45 0.448 0.65  0.003  0.72
Income 0.002 0.22 0.003 0.18  0.581  0.88  0.011  0.31
High Income Dummy 0.026 1.63 0.030 1.89 0.200 1.04 0.026 0.48
Marital Status 0.004 0.34 0.009 0.59 0.218 0.36  0.003  0.08
Family Size  0.004  0.34  0.004  0.40  0.679  0.97  0.039  1.91
Professional Dummy  0.002  0.12  0.017  0.87  0.308  0.40 0.002 0.43
Retired Dummy 0.003 0.21 0.003 0.18 0.046 0.08  0.034  1.54
Investment Experience 0.028 3.15 0.026 2.89 1.991 2.72 0.051 2.35
Financial Center Dummy  0.001  0.08  0.011  0.88  0.510  0.85  0.014  1.42
Options Dummy 0.034 2.51 0.043 1.79 1.517 2.62 0.062 3.12
Short Sale Dummy 0.051 2.36 0.021 1.55 0.978 1.64 0.035 1.33
Stock Portfolio Diversification 0.028 1.83 0.024 1.57 0.105 0.18  0.013  0.94
Stock Portfolio Size 0.023 1.39 0.023 1.43 1.288 2.03  0.011  0.28
Stock Portfolio Performance  0.032  1.29  0.033  2.07  0.672  1.17 0.001 0.31
No December Tax Loss Selling 0.003 0.29 0.002 0.18  0.614  1.66  0.018  1.47
Holds Tax-Deferred Account  0.003  0.59  0.003  0.58 0.168 1.02  0.017  1.62
Market Factor Exposure 0.021 2.78 0.019 2.43 0.595 3.08 0.009 0.51
SMB Factor Exposure 0.012 1.38 0.004 0.66 0.670 3.51 0.038 2.71
HML Factor Exposure 0.007 1.35 0.006 1.22 0.025 0.14 0.014 1.39
UMD Factor Exposure 0.031 3.35 0.024 2.98 0.449 2.75 0.016 1.68

Adjusted R2 0.042 0.043 0.037 0.029

Number of Observations 21,542 21,542 21,542 20,142

Panel B: Trade-Based Mutual Fund Portfolio Performance

(1) Holding period return (2) Holding period (3) One-month PTBSD (4) 12-month PTBSD

Independent Variable Coefficient t-statistic Coefficient t-statistic Coefficient t-statistic Coefficient t-statistic

Intercept 0.418 12.57 444.20 17.85 0.042 0.97  2.526  14.34

Behavioral Bias Proxies

Disposition Effect  0.059  2.46  25.15  4.26  0.070  2.48  0.295  2.26
Narrow Framing  0.054  3.40  15.16  2.97  0.096  3.48  0.462  3.26
Overconfidence Dummy  0.066  3.06  42.61  7.75  0.090  2.17  0.569  2.99
Male Dummy 0.018 0.53  3.36  0.56  0.018  1.09  0.114  1.63
Local Bias  0.005  0.14 10.02 2.67 0.013 0.69  0.356  2.27
Lottery Stocks Preference  0.037  2.27  24.17  2.36  0.058  2.27  0.551  2.34
Inattention to Earnings News  0.010  1.26  4.02  1.62  0.033  2.66  0.474  2.36
Inattention to Macroeconomic News  0.048  2.29  11.71  2.85  0.029  2.60  0.526  2.69
DEnHigh Income  0.065  3.17  19.66  2.67  0.061  2.55  0.485  2.07
DEnNo December Tax Loss Selling  0.037  1.99  15.69  2.89 0.002 0.36  0.079  1.39

Control Variables
Age  0.049  2.46 18.65 1.99  0.054  2.06  0.417  2.23
Income 0.015 0.22  2.27  0.25  0.005  0.15  0.084  0.72
High Income Dummy 0.014 0.94  4.58  1.39  0.024  1.63  0.257  1.26
18 W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27

Table 7 (continued )

Panel B: Trade-Based Mutual Fund Portfolio Performance

(1) Holding period return (2) Holding period (3) One-month PTBSD (4) 12-month PTBSD

Independent Variable Coefficient t-statistic Coefficient t-statistic Coefficient t-statistic Coefficient t-statistic

Marital Status 0.025 1.09 5.02 0.59 0.008 0.46 0.183 1.61
Family Size 0.016 1.82  2.65  0.27 0.007 0.17 0.061 0.20
Professional Dummy  0.010  0.18  4.49  0.42 0.013 0.88  0.191  1.27
Retired Dummy  0.038  1.68 27.61 3.33  0.037  2.17  0.197  2.19
Investment Experience 0.038 2.21 8.67 1.58 0.089 3.50 0.587 3.14
Financial Center Dummy 0.006 0.31  16.56  2.03 0.020 1.31  0.051  0.31
Options Dummy 0.040 1.97  33.55  5.56 0.050 2.14 0.302 2.71
Short Sale Dummy 0.034 1.82  12.02  2.01 0.041 1.86 0.181 1.98
Stock Portfolio Diversification 0.013 0.73 41.47 3.88 0.016 1.01 0.091 1.33
Stock Portfolio Size 0.026 1.70 3.33 0.55 0.022 1.55 0.071 0.95
Stock Portfolio Performance  0.042  2.50  25.00  4.92  0.017  1.05  0.409  2.65
No December Tax Loss Selling  0.015  1.32 45.25 3.35  0.074  2.77  0.223  1.85
Holds Tax-Deferred Account 0.023 1.95 7.11 1.53  0.013  0.38 0.035 0.25
Market Factor Exposure 0.004 0.16  26.14  3.53 0.047 2.09 0.261 1.78
SMB Factor Exposure 0.035 1.98  23.73  3.86 0.013 0.95 0.457 3.13
HML Factor Exposure  0.015  1.21  2.36  0.51 0.025 1.65 0.234 1.68
UMD Factor Exposure 0.024 1.11 16.83 2.99 0.017 0.88 0.095 0.76

Adjusted R2 0.045 0.093 0.040 0.064

Number of Observations 15,210 15,210 18,002 18,002

Investors with higher weight on expenses, 12-B-1 market-
ing fees, and front-end load funds typically experience
inferior fund performance.
Among the interactive terms, we see particularly poor
performance for high disposition effect investors who
select funds with high 12-B-1 marketing fees or high
front-end loads. This also appears to be the case for
investors with strong framing effects or overconfidence.
The coefficients for interactives for high inattention and
fees are uniformly significantly negative. Thus, investors
with particularly high behavioral biases who choose to
remain poorly informed could make particularly poor
choices, stumbling into mutual funds with high expense
ratios, high 12-B-1 marketing fees, or front-end loads.
This echoes the finding in Table 5 that behavioral biases
are particularly powerful in pulling investors into high
front end load funds. This is also consistent with the
possibility that the mutual fund industry positions certain
products to exploit particularly biased individuals.
In unreported results, we examine the performance
differences among investors who use index funds. We do
not find significant associations between the performance
of individual index fund portfolios and individual beha-
vioral biases. We consider different types of tests, includ-
ing univariate sorts and multivariate regressions with and
without controls or interaction terms. All our results
consistently show that behavioral biases do not affect
the performance of investors’ index fund portfolios. This
evidence indicates that investors can protect themselves
from their own worst impulses by holding index funds and
reinforces the classic intuition that most individual inves-
tors perform better if they stick to well-diversified index
funds. Our findings also echo Korniotis and Kumar
(forthcoming) who show that the performance difference
between smart and dumb investors is insignificant when
both hold well-diversified stock portfolios, but it is highly
significant for those that choose concentrated portfolios,
with smart investors outperforming by a wide margin.25
4.8. Aggregating the behavioral bias proxies and
other characteristics
Next, we measure the combined effects of investor
characteristics using both the factors constructed from
the behavioral bias proxies and other investor character-
istics and an equally weighted index that combines the
behavioral bias proxies. Panel A of Table 9 summarizes
regressions similar to those of Tables 4–7 but replaces the
individual investor characteristics with the first five
factors resulting from factor analysis described in
Section 4.1.
The first two columns study the first factor, which we
previously labeled Gambler. The evidence in the table
confirms this characterization. Gambler represents indi-
viduals who are less likely to use mutual funds, tend to
select high expense funds, are more likely to trend-chase,
and suffer significantly inferior mutual fund portfolio
performance as a consequence. Put another way, Gambler
employs mutual funds less than he probably should, but,
when he does, he makes poor use of them.
We previously identified the second factor as Smart,
given that the individual stock portfolio of this stereotype
avoids biases and displays relatively good performance.
The evidence in Panel A of Table 9 suggests that Smart’s
beneficial behavior extends to his use of mutual funds.
The signs and significance of regression coefficients indi-
cate that the Smart stereotype is more likely to use
25
This supports the notion that individual investors should be
encouraged to make good decisions, as with retirement savings plan
(Benartzi and Thaler, 2007).
 W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27 19

Table 8
Behavioral biases, mutual fund portfolio characteristics, and portfolio performance.
This table reports cross-sectional regression estimates with two different mutual fund portfolio performance measures as dependent variables: (1) the
mean net monthly percent return and (2) the Sharpe ratio computed using net returns multiplied by 100. There is one observation per investor. The
independent variables are behavioral bias proxies and inattention measures, mutual fund characteristics, bias-load interaction terms, and control
variables. Independent variables are defined in Appendix A. Mutual fund characteristics include the initial weight assigned to mutual funds in the equity
(stocks and mutual funds) portfolio and three expense measures of the mutual fund portfolio: the sample period mean expense ratio, the sample period
mean 12-B-1 fee, and the sample period mean front-end load. Bias-load interaction terms equal the multiplication between each of three behavioral bias
measures and each of three mutual fund expense ratio measures. The three behavioral bias measures are high disposition effect, strong framing effects,
and overconfidence. The inattention measure is the equally weighted average of the two stock-level inattention measures. The three expense ratio
measures are high expense ratios, high 12-B-1 fees, and high front-end loads. The mutual fund portfolio weight is measured at the time an investor enters
the sample or invests in mutual funds for the first time. High and low dummy variables are defined using the highest and the lowest quintile of the
respective variable. Investors with fewer than 12 months of data are excluded. Zip code clustered standard errors are used to obtain the t-statistics. The
statistically significant coefficient estimates are indicated in bold font. The individual investor data are from a large US discount brokerage house for the
1991–1996 period.

(1) Net monthly return (2) Net Sharpe ratio  100

Independent Variable Coefficient t-statistic Coefficient t-statistic

Intercept 1.320 13.14 40.156 21.80

Behavioral Bias Proxies

Disposition Effect  0.025  2.01  0.556  1.98
Narrow Framing  0.043  2.90  1.565  3.67
Overconfidence Dummy  0.021  2.00  1.446  2.24
Male Dummy  0.010  1.12  1.498  1.81
Local Bias 0.009 0.56 0.100 0.22
Lottery Stocks Preference  0.033  3.11  1.301  1.99
Inattention to Earnings News  0.015  2.11  1.114  2.34
Inattention to Macroeconomic News  0.025  2.34  0.989  2.00
DEnHigh Income  0.011  1.55 0.101 0.16
DEnNo December Tax Loss Selling  0.015  1.52  0.151  0.59

Mutual Fund Portfolio Characteristics

Initial Weight in Mutual Funds 0.044 3.71 1.721 3.65
Mutual Fund Portfolio Expense Ratio  0.010  0.74  0.730  3.44
Mutual Fund Portfolio 12-B-1 Fee 0.051 3.55  2.234  4.36
Mutual Fund Portfolio Front-End Load  0.048  3.97  2.142  5.02

Bias-load interaction terms

High Disposition EffectnHigh Expense Ratio  0.004  0.40  0.487  1.49
High Disposition EffectnHigh 12-B-1 Fee  0.025  2.99  2.356  7.15
High Disposition EffectnHigh Front-End Load  0.054  5.09  2.381  8.58
Strong Framing EffectsnHigh Expesne Ratio  0.008  0.86  0.268  0.79
Strong Framing EffectsnHigh 12-B-1 Fee  0.015  1.91  2.298  6.93
Strong Framing EffectsnHigh Front-End Load  0.055  7.09  2.464  8.71
OverconfidentnHigh Expense Ratio  0.006  0.71  0.544  1.66
OverconfidentnHigh 12-B-1 Fee  0.024  3.88  2.433  7.39
OverconfidentnHigh Front-End Load  0.052  6.86  2.312  8.35
High InattentionnHigh Expense Ratio  0.017  3.88  1.119  2.83
High InattentionnHigh 12-B-1 Fee  0.022  2.46  2.106  4.73
High InattentionnHigh Front-End Load  0.063  4.97  0.927  2.21

Control Variables
Coefficient estimates have been suppressed.

Adjusted R2 0.055 0.051

Number of Observations 21,542 21,542

mutual funds, more likely to use funds with low expense
ratios or loads, less likely to trend-chase, and enjoys
significantly positive mutual fund performance based on
all eight of the performance measures we examine.
We previously labeled the third factor Overconfident
based on trading of individual equities and other char-
acteristics. The evidence on Overconfident’s mutual fund
portfolio confirms our impression that this stereotype
is a poor decision-maker. Overconfident avoids participa-
tion in mutual funds and trend-chases to an even
greater degree than Gambler, and he also tends to select
high expense, high load, and high turnover funds.
Whether Overconfident’s mutual fund performance is
even worse than Gambler’s varies across our eight per-
formance measures.
We labeled the fourth factor Narrow Framer. Narrow
Framer’s mutual fund participation is about as bad as
Gambler’s, though not as bad as Overconfident’s. Small
holdings of mutual funds, selection of high expense funds,
trend chasing, and consequent poor performance are
also evident, though milder than for Gambler and
Overconfident.
Finally, the mutual fund use and performance repre-
sented by the fifth factor, Mature, mirrors what we
reported earlier for Mature’s individual stock portfolio.
To Mature’s credit, he participates and holds mutual funds
20 W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27
to a greater extent than our other stereotypes and avoids
high-expense funds and trend chasing to an even greater
extent than Smart. However, other elements of Mature’s
decision making about mutual funds yield significant
negatives on four of our eight performance measures.
This finding is consistent with the evidence in Korniotis
and Kumar (2011), who show that older investors are
more likely to follow common investing rules but employ
them less effectively and subsequently experience worse
portfolio performance.
One interesting observation from Panel A of Table 9
concerns the use of index funds. Unsurprisingly, Gambler,
Overconfident, and Narrow Framer score negatively on
both index fund participation and holdings. Their lack of
interest in these useful and prudent funds is consistent
with a pattern of bad decision making in their use of other
funds and individual stocks. Mature seems to participate
in index funds as frequently as Smart and holds an even
greater proportion of such funds than Smart. However,
this is not enough to overcome Mature’s other decision-
making problems and yield positive performance.
As an alternative to the five named factors from factor
analysis, Panel B of Table 9 presents similar results based
on an equally weighted behavioral index.26 Specifically,
we normalize each behavioral factor to have a mean of
zero and a standard deviation of one, then average these
normalized behavioral proxies for each individual in the
sample. The table shows that in all cases the bias index is
statistically significant and, more important, economically
significant. In the discussion that follows, we infer the
decisions of investors in the lowest and the highest bias
quintiles.
The average behavioral bias index values of investors
in the extreme bias quintiles are  0.709 and 0.627. The
standard deviation of the behavioral bias measure is
0.491, which indicates that the low and high behavioral
bias quintiles are 2.721 standard deviations away from
each other. In the participation regressions, the bias index
estimates indicate that an investor who moves from the
lowest to highest bias quintile reduces the probability of
investing in mutual funds by 0.439  2.721 ¼1.189%,
while the propensity to invest in index funds drops by
1.933%. In the holdings regressions, we find that moving
across the extreme bias quintiles reduces the weight
assigned to mutual funds by 2.038%. This effect is even
stronger (5.254%) for index funds. The other regressions
summarized in Panel B of Table 9 paint a similar picture.
Behavioral biases are associated with selecting higher
expense funds, trend chasing with funds, and significant
under-performance from fund holdings. In economic
terms, the combined effects of all behavioral biases are
moderately to strongly significant.
5. Additional diagnostics
In this section, we discuss additional tests that aug-
ment our main results by examining their robustness,
26
This includes the five basic biases and the two inattention
measures but excludes the two tax interactives.
considering alternative explanations for our findings, and
offering additional evidence on the most biased investors.
5.1. ‘‘Play money’’ accounts?
In our first set of additional considerations, we test
whether our results are driven primarily by a ‘‘play
money’’ effect. We compute the average portfolio
size-to-annual income ratio for each investor, excluding
investors in the lowest quintile. Unreported results indi-
cate that our findings remain qualitatively similar even
when we exclude investors who hold portfolios that
are small relative to their annual income. For example,
the coefficient estimate of the bias index in Table 4,
Column 1 is 0.749 (t-statistic¼  5.49) for the full
sample and  0.755 (t-statistic ¼ 5.88) for the subsam-
ple that excludes potential play money. This evidence
indicates that our results are unlikely to be induced by a
subset of investors who maintain a small portfolio and
trade it for irrational or frivolous reasons.
5.2. Mutual fund decisions for retirement accounts
Many investors in our sample hold personal retire-
ment accounts. About 42% of the accounts in our sample
are retirement accounts (IRA or Keogh).27 Thus, we
examine whether investors’ mutual fund choices vary
between retirement and non retirement accounts.28 It is
plausible that the adverse effects of behavioral biases on
mutual fund decisions are mainly concentrated in non
retirement accounts. We could view a retirement account
as the opposite of a play money account and predict that
it is managed in a more conservative manner. We define a
‘‘taxable account only’’ dummy, which is set to zero for
investors who hold only retirement accounts in their
equity portfolios and one otherwise. We include this
dummy variable as an additional independent variable
in our regression specifications.29
We find that investors do not exhibit a greater pro-
pensity to hold mutual funds in their retirement accounts.
The taxable account only dummy has an insignificant
coefficient estimate (  0.003 with z-statistic of 0.25).
No evidence exists of a stronger propensity to hold index
funds for investors who hold retirement accounts. The
taxable account only dummy has a coefficient estimate of
 0.011 and z-statistic of  1.19. Even among investors
who choose to hold mutual funds, no evidence shows that
they allocate a larger proportion of their equity portfolio
27
Among 158,031 accounts in our sample there are 64,416 IRA and
1,299 Keogh accounts. A typical household holds multiple accounts. Out
of 77,995 households in the sample, 43,706 hold at least one retirement
account.
28
See Sialm and Starks (forthcoming) for evidence that funds
directed at taxable investors appear more tax-efficient than funds
directed at retirement accounts. This approach is distinct from our use
of the holds tax deferred account dummy in earlier regressions, which
identifies all accounts, regular or tax-deferred, held by someone who
holds at least one tax-deferred account.
29
All results are qualitatively similar when reestimated over two
subsamples: investors who hold only retirement accounts and investors
who hold retirement and non-retirement accounts.
Table 9
Associations between aggregated behavioral biases and other characteristics, fund decisions, and consequences.
Panel A reports the combined effect of multiple bias proxies on mutual fund decisions using the five most important factors from factor analysis of the behavioral bias proxies and other investor
characteristics. Panel B reports the combined effect of multiple bias proxies on mutual fund decisions using an equally weighted index of the behavioral bias proxies. The behavioral factors are defined in
Appendix A and the factor analysis is detailed in Table 3. This table summarizes estimates of the regressions of Tables 4–7 in which the behavioral proxies and other investor characteristics are replaced with
the five most important factors from factor analysis. For brevity, only the coefficient estimates for the variable of interest are reported. PTBSD equals the post-trade buy–sell return differential.

Panel A: Estimates when the dependent variable is a factor of the behavioral bias proxies and other investor characteristics
Gambler factor Smart factor Overconfident factor Narrow Framer factor Mature factor Adjusted Number of
R2 Observations
Regression Type Coefficient t- or z- Coefficient t- or z- Coefficient t- or z- Coefficient t- or z- Coefficient t- or z-
statistic statistic statistic statistic statistic

Participation (Table 4)
All mutual funds: column 2  0.339  3.77 0.125 2.24  0.722  3.75  0.350  2.73 0.258 3.11 0.059 21,542
Index funds only: column 4  0.229  2.93 0.171 2.59  0.402  2.68  0.311  2.60 0.174 2.81 0.051 21,542

W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27

Holdings (Table 4)
Weight in all mutual funds: column 5  2.827  3.02 1.764 1.42  3.193  3.75  1.981  2.73 2.541 3.55 0.049 21,542
Weight in index funds only: column 6  1.901  2.71 1.166 1.81  2.792  3.18  1.591  2.76 2.407 2.76 0.055 21,542
Portfolio characteristics (Table 5)
Expense ratio: column 1 0.209 5.15  0.014  2.88 0.079 4.46 0.027 2.13  0.111  5.42 0.038 21,542
Front-end load: column 2 0.132 2.72  0.017  2.15 0.082 2.21 0.063 1.91  0.085  3.11 0.031 21,542
Fund turnover: column 3 0.114 3.71  0.029  2.31 0.145 3.59 0.033 1.22  0.148  4.68 0.043 21,542

Trend chasing (Table 6)

12-Month lagged fund performance: 1.180 2.93  0.096  1.23 1.729 3.02 0.863 1.97  1.367  2.65 0.071 21,542
column 1
24-Month lagged fund performance: 1.156 2.61  0.532  2.33 1.941 2.98 1.167 2.57  2.079  3.14 0.050 21,542
column 2

Portfolio performance (Table 7)

Mean monthly returns: Panel A,  0.109  2.65 0.085 2.33  0.111  2.82  0.066  1.92  0.025  1.82 0.028 21,542
column 1
Net monthly returns: Panel A, Column 2  0.122  2.60 0.076 2.51  0.189  3.77  0.058  1.98  0.019  1.31 0.026 21,542
Net Sharpe ratio: Panel A, column 3  2.568  3.20 2.853 3.12  1.110  2.04  2.109  3.08 0.664 1.12 0.024 21,542
Four-factor alpha: Panel A, Column 4  0.164  2.84 0.123 2.34  0.092  2.78  0.058  2.88  0.026  1.26 0.021 21,542
Holding period returns: Panel B,  0.095  3.08 0.059 2.42  0.074  2.90  0.078  2.94  0.055  2.40 0.033 15,210
column 1
Holding period: Panel B, column 2  27.904  3.07 18.514 2.38  15.504  2.27  8.211  2.58 21.675  2.99 0.065 15,210
One-month PTBSD: Panel B, column 3  0.152  3.49 0.125 3.48  0.093  3.36  0.051  2.77  0.076  3.21 0.025 15,210
One-year PTBSD: Panel B, column 4  0.916  3.37 0.936 3.70  0.691  3.28  0.544  2.82  0.722  2.87 0.050 15,210

Panel B: Estimates when dependent variable is equally weighted index of behavioral bias proxies
Regression Type Coefficient t- or z-statistic Adjusted R2 Number of Observations

Participation (Table 4)
All mutual funds: column 2  0.439  7.11 0.033 21,542
Index funds only: column 4  0.719  7.41 0.065 21,542

Holdings (Table 4)
Weight in all mutual funds: column 5  0.744  5.44 0.068 21,542
Weight in index funds only: column 6  1.933  4.72 0.142 21,542

Portfolio characteristics (Table 5)

Expense ratio: column 1 0.032 4.13 0.055 21,542

21
22 W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27

to mutual funds. The taxable account only dummy has

Number of Observations
statistically insignificant estimates in all specifications.
Examining the characteristics of funds in the portfolios
21,542 of investors who hold only retirement accounts, we find
21,542

21,542
21,542

21,542
21,542
21,542
20,142
15,210
15,210
15,210
15,210
that they do not have lower expense ratios, lower front
end loads, or lower turnover. Moreover, there is a greater
tendency to engage in trend chasing among these inves-
tors. When we reestimate the trend chasing regressions of
Table 6 with the taxable account only dummy variable, it
has a significantly positive coefficient estimate (coeffi-
cient estimate¼0.029, t-statistic ¼2.99).
To examine whether ‘‘retirement accounts only’’ inves-
tors exhibit better performance, we reestimate all the
performance regressions with the taxable account
dummy as an additional independent variable. In all
Adjusted R2

specifications, this dummy variable has an insignificant

0.044
0.053

0.083
0.065

0.038
0.042
0.031
0.028
0.033

0.029
0.048
0.080

coefficient estimate. Overall, we do not find evidence of

superior mutual fund decisions when investors hold
retirement accounts. The adverse effects of behavioral
biases on mutual fund decisions are similar across both
retirement and non retirement accounts. Thus, behavio-
rally biased investors do not manage retirement funds
any more carefully than their regular accounts.
t- or z-statistic

5.3. How do the most severely biased investors use

 3.71
 3.47
 3.85
 3.39
 5.16
 4.44
 4.12
 4.23
3.55

3.55
2.01

4.90

mutual funds?

Next, we consider whether the most severely behavio-

rally biased investors tend to concentrate in particular
types of funds, how often they trade those funds, and
what consequences for performance result. We summar-
Panel B: Estimates when dependent variable is equally weighted index of behavioral bias proxies

ize unreported (but available on request) evidence on

holdings, holding periods, and returns for the mutual
funds owned by quintiles of investors who score highest
on disposition effect, narrow framing, overconfidence,
Coefficient

 21.175
 2.499

 0.381
 0.622
 0.052
 0.062

 0.055
 0.063
1.441
1.276
0.033
0.016

local bias, preference for lottery stocks, and inattention

to news. Our primary prediction is that severely biased
investors are more likely to select higher expense funds
and avoid index funds. We also expect the strongest
Disposition Effect and Overconfidence Dummy investors
to turn their mutual fund holdings over relatively
frequently.
There is much evidence to support such conjectures.
For example, front-load funds are 27.15% of the mutual
fund holdings of typical investors, but we observe statis-
12 month lagged fund performance: column 1
24 month lagged fund performance: column 2

tically significantly greater front-load fund holdings for

Holding period returns: Panel B, Column 1
Mean monthly returns: Panel A, column 1
Net monthly returns: Panel A, column 2

the highest Disposition Effect (31.05%), Narrow Framing

One-month PTBSD: Panel B, column 3
Four-factor alpha: Panel A, Column 4

(26.69%), and Overconfidence Dummy (30.81%) cohorts.

Net Sharpe ratio: Panel A, column 3

One-year PTBSD: Panel B, column 4

Holding period: Panel B, Column 2

The mutual fund holdings of the highest Local Bias and

Portfolio performance (Table 7)

Inattention Bias investors have, on average, about 2% less

front load funds than typical investors. Holding periods
Front-end load: column 2
Fund turnover: column 3

Trend chasing (Table 6)

for front end load funds are, on average, significantly low

for highest Disposition Effect (215 days) and Overconfi-
Table 9 (continued )

dence Dummy (233 days) investors and are significantly

Regression Type

high for highest Narrow Framing (306 days), Local Bias

(323 days), and Inattention Bias (327 day) investors.
Somewhat similar, but weaker, results are observed for
holdings of back-end load funds and in comparing hold-
ings of index funds and other funds.
 W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27
Table A1
Brief description of behavioral proxies and other investor characteristics.
Variable Description
Disposition Effect Investor’s propensity to sell
winners too early and hold losers
too long. Measured by the
proportion of gains realized
minus proportion of losses
realized, adjusted for the peer
group’s disposition effect.
Narrow Framing Investor’s propensity to select
investments individually instead
of considering the broad impact
on her portfolio. Measured by the
degree of trade clustering,
adjusted for the peer group’s
framing propensity.
Overconfidence Investor’s propensity to trade
frequently but unsuccessfully.
Measured with a dummy
variable.
Local Bias Investor’s propensity to select
stocks with headquarters close to
his geographical location.
Lottery Stock Preference Investor’s propensity to select
stocks with lottery-like features
(low price, volatile returns, and
skewed returns).
Inattention to Earnings Degree to which investor does
News not trade a particular individual
stock around earnings news.
Inattention to Degree to which investor does
Macroeconomic News not trade any individual stocks
around macroeconomic news
events.
Fund-Level Local Bias Investor’s propensity to select
funds with headquarters close to
his geographical location.
Fund Level Inattention Individual’s propensity to trade
mutual funds around
macroeconomic news events.
DEnNo December Tax Extent of Disposition Effect for
Loss Selling investor who ignores tax loss
selling.
DEnHigh Income Extent of Disposition Effect for
investor with high income.
Age Age of the investor.
Income Income of the investor.
High Income Dummy Affluence of the household
Marital Status Marital status of the investor.
Family Size Family size.
Professional Dummy
References
Shefrin and Statman
(1985), Odean (1998), and
Kumar and Lim (2008).
Kahneman and Lovallo
(1993), Kahneman (2003),
and Kumar and Lim
(2008).
Odean (1999) and Barber
and Odean (2001).
Huberman (2001), Coval
and Moskowitz (1999),
Grinblatt and Keloharju
(2001), Zhu (2003), and
Ivković and Weisbenner
(2005).
Barberis and Huang
(2008), and Kumar (2009).
New in this paper.
New in this paper.
New in this paper.
New in this paper.
New in this paper.
New in this paper.
Self-reported.
Self-reported.
Graham and Kumar
(2006).
Self-reported.
Self-reported.
Self-reported.
23
Calculation
Proportion of gains realized (PGR) ¼realized
gains/(realized gains þpaper gains). Proportion
of losses realized (PLR) ¼realized losses/
(realized losses þ paper losses). A peer group of
an investor is defined as those in the same
quintile of portfolio size, trading frequency and
number of stocks. Adjusted PGR ¼PGR of an
investor – mean PGR of peer group. Adjusted
PLR ¼PLR of an investor – mean PLR in her peer
group. Adjusted disposition effect ¼adjusted
PGR – adjusted PLR.
Trade clustering ¼ 1 – (number of trades/number
of trading days). A peer group of an investor is
defined as those in the same quintile of portfolio
size, trading frequency, and number of stocks.
Adjusted trade clustering ¼ trade clustering –
mean trade clustering of the peer group.
Dummy variable equal to one for investors in
the highest portfolio turnover quintile and
lowest performance quintile for their individual
common stock trading and zero otherwise. Also
captured by a gender dummy variable equal to
one if the investor is male.
Local bias of an investor’s common stock
portfolio ¼ mean distance between her home zip
code and the headquarters’ zip codes of
companies in her portfolio – mean distance
between home zip code and the headquarters’
zip codes of companies in the market portfolio.
Investor’s mean portfolio weight (relative to the
weight in the market portfolio) assigned to
stocks that have bottom quintile prices, top
quintile idiosyncratic volatility, and top quintile
idiosyncratic skewness.
1 – (number of investor trades around the
event)/(total number of investor trades) on days
t–1, t, and t þ1 where t is the date of quarterly
earnings announcement from the Institutional
Brokers’ Estimate System (I/B/E/S). Only trades
around each firm’s own earnings news are
considered.
1 – (number of investor trades around the
event)/(total number of investor trades) on days
t–1, t, and t þ1 where t is the date of federal
funds target rate changes, Non-Farm Payroll
reports, and producer price index
announcements.
Equals mean distance between the investor’s
home zip code and the headquarters of the
mutual funds in his portfolio – the same mean
distance averaged across all investors in the
sample.
Equals 1 - (number of mutual fund trades
around the event)/(total number of mutual fund
trades).
Disposition Effect times dummy variable equal to
one for investor with no December tax loss
selling.
Disposition Effect times High Income Dummy.
Age of the investor.
Annual income of investor.
Equals one if the investor’s average income
exceeds $125,000 and zero otherwise.
Equals one if the investor is married and zero
otherwise.
Number of family members in the household.
24 W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27
Table A1 (continued )
Variable Description
A indicator whether an investor
is a white collar or blue collar
worker.
Retired Dummy Retirement status of investor.
Investment Experience Investment experience of
investor.
Financial Center Dummy An indicator whether an investor
lives near a financial center.
Options Dummy An indicator for whether the
investor has ever traded an
option in the investment account.
Short Sale Dummy An indicator for whether the
investor has ever shorted a stock
in the investment account.
Stock Portfolio The extent to which the stock
Diversification portfolio of the investor is
diversified.
Stock Portfolio Size The size of the investor’s
portfolio.
Stock Portfolio Risk-adjusted excess returns of
Performance the investor’s stock portfolios.
No December Tax Loss An indicator if the investor fails
Selling to realized losses of his stock
trade in December
Holds Tax-Deferred An indicator for whether the
Account investor holds a tax deferred
account in the brokerage.
Stock Portfolio Market The beta of the investor’s stock
Factor (Beta) Exposure portfolio.
Stock Portfolio SMB The loading of the stock portfolio
Factor (Size) Exposure on the small-minus-big factor
(SMB) in a four-factor model
regression.
Stock Portfolio HML The loading of the stock portfolio
Factor (Value) Exposure on the high-minus-low book-to-
market factor (HML) in a four-
factor model regression.
Stock Portfolio UMD The loading of the stock portfolio
Factor (Momentum) on the up-minus-down factor
Exposure (UMD) in a four-factor model
regression.
6. Summary and conclusions
Using thousands of brokerage accounts of US indivi-
dual investors, we show that behavioral factors influence
the decisions of individual investors to hold individual
stocks as opposed to mutual funds, including passive
index funds. As might be expected, investors with higher
income, relatively higher educational level, and greater
investment experience are more likely to use mutual
funds and benefit from their choices. However, investors
References Calculation
Equals zero for investor in a blue collar
profession and one otherwise.
Self-reported. Equals one if the investor is retired and zero
otherwise.
Self-reported. Years since the brokerage account was open.
Based on self reported Equals one if the zip code of the investor’s
address. address is close to a metropolitan area and zero
otherwise.
Based on investment Equals one if the investor executes at least one
record. option trade during the sample period and zero
otherwise.
Based on investment Equals one if the investor executes at least one
record. short trade during the sample period and zero
otherwise.
Based on investment Negative of Normalized Portfolio Variance, that is,
record. the variance of the portfolio of individual
domestic securities divided by the average
variance of the individual common stocks in the
portfolio.
Based on investment Sample-period average market capitalization of
record. the investor’s common stock portfolio.
Based on investment The intercept, alpha, from the Capital Asset
record. Pricing Model regression with the monthly
common stock portfolio return as dependent
variable.
Based on investment 1– proportion of realized losses in December¼1 –
record. (realized losses in December/number of paper
losses)
Based on investment Equals one if the investor holds an Individual
record. Retirement Account (IRA) or Keogh account in
the brokerage.
Based on investment The loading of the stock portfolio on the market
record. factor in a four-factor regression model with
market, size, value, and momentum factors. All
four factors come from Ken French’s website,
(mba.tuck.dartmouth.edu/pages/faculty/
ken.french/).
Based on investment The loading of the stock portfolio on the size
record. (SMB) factor in a four-factor regression model
with market, size, value, and momentum
factors. All four factors come from Ken French’s
website.
Based on investment The loading of the stock portfolio on the value
record. (HML) factor in a four-factor regression model
with market, size, value, and momentum
factors. All four factors come from Ken French’s
website.
Based on investment The loading of the stock portfolio on the
record. momentum (UMD) factor in a four-factor
regression model with market, size, value, and
momentum factors. All four factors come from
Ken French’s website.
with strong behavioral biases tend to gravitate toward
individual stocks and avoid low expense index funds.
When they do invest in mutual funds, they tend to
select high expense funds, trade funds frequently,
avoid index funds, and time their buys and sells poorly,
thereby damaging their portfolio’s performance. They
also exhibit stronger trend-chasing behavior, suggesting
that trend chasing by mutual fund investors is not the
result of rationally inferring managerial skill from past
performance.
 W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27 25

Table A2
Univariate summary statistics on investor characteristics (21,542 observations).

Variable Mean Standard Minimum 10th 25th Median 75th 90th Maximum
deviation percentile percentile percentile percentile

Disposition Effect 3.719 112.197  100.00  100.00  11.111 12.609 66.667 100.000 100.000
Narrow Framing 0.010 0.155  0.683  0.207  0.081 0.038 0.131 0.181 0.440
Overconfidence Dummy 0.090 0.287 0.000 0.000 0.000 0.000 0.000 0.000 1.000
Male Dummy 0.898 0.282 0.000 0.899 1.000 1.000 1.000 1.000 1.000
Local Bias 0.273 0.395  1.323  0.204 0.058 0.272 0.542 0.773 0.996
Lottery Stocks Preference 12.025 17.206 0.000 0.000 0.000 4.265 18.510 33.644 100.000
Inattention to Earnings News 0.057 0.061 0.000 0.000 0.000 0.048 0.087 0.133 0.500
Inattention to Macroeconomic 0.301 0.143 0.000 0.133 0.214 0.292 0.375 0.476 1.000
News
Fund Level Local Bias 0.000 0.703  1.249  0.854  0.468  0.97 0.394 1.015 4.171
Fund Level Inattention 0.303 0.107 0.000 0.250 0.304 0.304 0.304 0.333 1.000
Age 50.429 11.537 18.000 36.000 42.000 52.000 56.000 68.000 94.000
Income 89.358 60.381 7.500 35.000 62.500 87.500 112.500 250.000 250.000
High Income Dummy 0.241 0.427 0.000 0.000 0.000 0.000 0.000 1.000 1.000
Marital Status 0.736 0.386 0.000 0.000 0.736 1.000 1.000 1.000 1.000
Family Size 2.814 1.417 1.000 1.000 2.000 3.000 4.000 5.000 10.000
Professional Dummy 0.610 0.336 0.000 0.000 0.610 1.000 1.000 1.000 1.000
Retired Dummy 0.166 0.256 0.000 0.000 0.000 0.000 0.166 0.166 1.000
Investment Experience 9.809 3.190 5.255 5.880 6.915 9.630 12.019 13.964 22.373
Financial Center Dummy 0.327 0.469 0.000 0.000 0.000 0.000 1.000 1.000 1.000
Options Dummy 0.124 0.330 0.000 0.000 0.000 0.000 0.000 1.000 1.000
Short Sale Dummy 0.138 0.345 0.000 0.000 0.000 0.000 0.000 1.000 1.000
Stock Portfolio Diversification  0.422 0.135  0.966  0.598  0.514  0.422  0.323  0.245 0.000
Stock Portfolio Size 36.410 98.119 0.001 4.255 7.824 15.326 32.277 71.899 4079.582
Ln(Stock Portfolio Size) 2.797 1.159  7.082 1.448 2.057 2.729 3.474 4.275 8.314
Stock Portfolio Performance  0.378 1.460  11.474  2.111  1.116  0.278 0.468 1.253 6.437
No December Tax Loss Selling 0.818 0.386 0.000 0.000 1.000 1.000 1.000 1.000 1.000
Holds Tax-Deferred Account 0.490 0.500 0.000 0.000 0.000 0.000 1.000 1.000 1.000
Market Factor Exposure 1.196 0.557  1.911 0.555 0.850 1.157 1.521 1.895 3.901
SMB Factor Exposure 0.853 1.028  2.163  0.268 0.098 0.675 1.410 2.257 7.810
HML Factor Exposure 0.182 0.838  3.258  0.797  0.359 0.119 0.647 1.269 5.279
UMD Factor Exposure  0.331 0.667  3.898  1.182  0.704  0.267 0.089 0.410 2.986

When we use factor analysis to characterize associa-
tions among investor characteristics, we find interesting
and intuitive patterns along multiple dimensions of bias
and other characteristics that often crop up in the same
individual. There is consistency across the behavioral
biases, other characteristics, use of individual stocks, use
of mutual funds, and resultant performance that our
Gambler, Smart, Overconfident, Narrow Framer, and
Mature stereotypes display.
Our evidence on behavioral biases and mutual fund
clienteles provides a new perspective on puzzles in
mutual fund investment presented by previous authors.
Several authors trace the mutual fund decisions of indi-
vidual investors to such factors as excess focus on front-
end loads, advertising, search costs, and complexity of
fund features intended to exploit consumers.30 Our evi-
dence shows that investors who score high on behavioral
biases tend to invest in funds with higher expense ratios
and loads. They experience poor investment performance
as a result.
In his American Finance Association presidential
address, Martin Gruber (1996) notes several puzzling
30
See Barber, Odean and Zheng (2005), Hortacsu and Syverson
(2004), and Carlin (2008).
aspects of individual portfolio allocation decisions. He
speaks of ‘‘sophisticated’’ investors who make decisions
based on performance and ‘‘disadvantaged’’ investors who
are susceptible to sales pressure or constrained by tax or
institutional issues. In his presidential address, John
Campbell (2006) suggests that naı̈ve investors could
subsidize sophisticated investors in financial products
such as mortgages. Our results echo the spirit of these
ideas. A complex set of factors, some rational and some
behavioral, appear to drive investors’ stocks versus funds
decisions and their mutual fund choices after they decide
to invest in mutual funds. Some types of investors appear
to make effective choices that enhance portfolio perfor-
mance, while others do not.
Given the misuse of equity mutual funds, a public
campaign to increase awareness of basic investment
principles and the benefits and pitfalls of equity mutual
funds is likely to help many types of individual investors
make better decisions. Furthermore, the lack of attention
to low cost or index funds suggests more explicit dis-
closure of fund expenses and turnover, perhaps even as
prominent as the health warnings now displayed on
packets of cigarettes. Finally, the reliance of mutual fund
investors on broker-supplied information at the time a
fund is selected and on delegated investment decisions
afterward suggests that even more explicit disclosure of
26 W. Bailey et al. / Journal of Financial Economics 102 (2011) 1–27
fund characteristics be imposed on brokerage firms and
fund managers.
Appendix A
Descriptions of behavioral proxies and other investor
characteristics can be found in Tables A1. Summary
statistics on investor characteristics can be found in
Tables A2.
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