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The mutual funds puzzle and the elusive von Neumann-Morgenstern preference relation

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  • Nisani, Doron
  • Shelef, Amit
  • Sonenshine, Ralph
  • David, Or

Abstract

This research studies the Mutual Funds Puzzle from the viewpoint of an economic agent that satisfies the von Neumann-Morgenstern preference relation. We postulate that the probability of a fund manager to outperform the market decreases in a growing market. To examine this supposition, we prove that a risk-averse investor's behavior is consistent with the binary econometric model and develop a ranking methodology for mutual funds' performances. We find supporting evidence for our conjecture in examining the Israeli capital market during 1/1/2009–3/13/2022. Subsequently, we conclude that investors regard mutual funds as hedging instruments for countering unexpected events rather than investment instruments.

Suggested Citation

  • Nisani, Doron & Shelef, Amit & Sonenshine, Ralph & David, Or, 2024. "The mutual funds puzzle and the elusive von Neumann-Morgenstern preference relation," International Review of Financial Analysis, Elsevier, vol. 92(C).
    • Handle: RePEc:eee:finana:v:92:y:2024:i:c:s1057521924000310
    DOI: 10.1016/j.irfa.2024.103099
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    More about this item

    Keywords

    von Neumann-Morgenstern model; Stochastic dominance rules; Mutual funds puzzle; Performance measurement;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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