Limited Attention and Portfolio Choice: The Impact of Attention Allocation on Mutual Fund Performance

Document Type

Article

Publication Date

9-12-2019

Publication Title

Financial Management

First page number:

1

Last page number:

43

Abstract

This study proposes that the performance of mutual fund managers is linked to how efficiently they allocate attention across assets in their investment set. Motivated by existing models of optimal portfolio choice and rational inattention, we posit that the efficiency of attention allocation increases when a manager chooses larger (smaller) active positions in assets that need more (less) information acquisition effort to resolve uncertainty about future payoffs. We show that the efficiency of attention allocation has a significantly positive impact on future fund performance. Efficient attention allocation has a lesser impact on performance as the total demands on a manager's limited attention increase.

Keywords

Attention allocation; Limited attention; Mutual funds; Performance evaluation

Disciplines

Finance and Financial Management

Language

English

UNLV article access

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