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Sensation Seeking and Hedge Funds

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  • STEPHEN BROWN
  • YAN LU
  • SUGATA RAY
  • MELVYN TEO

Abstract

We show that, motivated by sensation seeking, hedge fund managers who own powerful sports cars take on more investment risk but do not deliver higher returns, resulting in lower Sharpe ratios, information ratios, and alphas. Moreover, sensation‐seeking managers trade more frequently, actively, and unconventionally, and prefer lottery‐like stocks. We show further that some investors are themselves susceptible to sensation seeking and that sensation‐seeking investors fuel the demand for sensation‐seeking managers. While investors perceive sensation seekers to be less competent, they do not fully appreciate the superior investment skills of sensation‐avoiding fund managers.

Suggested Citation

  • Stephen Brown & Yan Lu & Sugata Ray & Melvyn Teo, 2018. "Sensation Seeking and Hedge Funds," Journal of Finance, American Finance Association, vol. 73(6), pages 2871-2914, December.
    • Handle: RePEc:bla:jfinan:v:73:y:2018:i:6:p:2871-2914
    DOI: 10.1111/jofi.12723
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