Abstract: Investors of different levels of rationality are likely to have different investment behavior. Institutional and individual investors are two groups representing distinct levels of rationality. The difference in the behavior of the two types of investors is probably the cause of inconsistent conclusions of many financial market studies. Given the advantage of mutual funds market in differentiating investors, this paper investigates the behavioral difference of the two groups of investors in open-ended funds. We find that individual investors value historical performance without being able to identify risk. “Redemption Puzzle” only exists in individual investors. Individual investors cannot obtain abnormal returns while institutional investors always make the right choice by valuing abnormal returns. In addition, we find the evidence that the irrationality of individual investors is manipulated by fund managers. Marketing strategies (e.g. high dividend payout) attract individual rather than institutional investors’ cash flow. This paper offers a new perspective studying market puzzle and investor behavior, provides a consist explanation for controversial topics and has special reference to market supervision and investors protections.
Keywords: Individual Investor, Institutional Investor, Rationality, Mutual Fund, Investment Behavior
source:Finance & Trade Economics ,No10,2013