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Limited attention and portfolio choice: The impact of attention allocation on mutual fund performance

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  • Swasti Gupta‐Mukherjee
  • Ankur Pareek

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.

Suggested Citation

  • Swasti Gupta‐Mukherjee & Ankur Pareek, 2020. "Limited attention and portfolio choice: The impact of attention allocation on mutual fund performance," Financial Management, Financial Management Association International, vol. 49(4), pages 1083-1125, December.
    • Handle: RePEc:bla:finmgt:v:49:y:2020:i:4:p:1083-1125
    DOI: 10.1111/fima.12294
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    2. Corbet, Shaen & Goodell, John W., 2022. "The reputational contagion effects of ransomware attacks," Finance Research Letters, Elsevier, vol. 47(PB).
    3. Choi, Hae Mi & Gupta-Mukherjee, Swasti, 2022. "Analysts’ reliance on industry-level versus firm-specific information: Implications for information production," Journal of Banking & Finance, Elsevier, vol. 143(C).
    4. Hu, Yitong & Li, Xiao & Goodell, John W. & Shen, Dehua, 2021. "Investor attention shocks and stock co-movement: Substitution or reinforcement?," International Review of Financial Analysis, Elsevier, vol. 73(C).

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