ARE PROFESSIONAL FUND MANAGERS LESS LIKELY TO SELL WINNERS? EVALUATING HOW ATTENTION ALLOCATION IMPACTS BEHAVIOURAL BIASES

Contemporary research shows the implications of investor biases on the decision-making of economic agents. Our understanding so far, that real-world agents are typical utility maximising agents, has been modified by abundant empirical evidence offered by behavioural economists. Extant research suggests that the behaviour of real-world agents exhibit marked departures from neoclassical assumptions of rationality. We begin by examining the behavioural biases of an essential class of institutional investors - professional asset managers. Using fund holdings data, we find that loser funds exhibit a higher tendency to liquidate winning positions and this tendency persists through time. Our study contributes to the existing strand of literature by highlighting the role of cognitive constraints on behavioural biases and financial decision-making. We highlight that this tendency can help rationalise the fluctuations in risk attitude over different phases of business cycles. More specifically, we examine the incidence of behavioural biases, such as the disposition effect and doubling tendency under different periods of attention allocation. Using cross-sectional tests, we highlight the correlation between attention allocation and the incidence of disposition bias. In particular we show that sophisticated investors exhibit fewer biases during periods of economic slowdown. Moreover, we also provide cross-sectional evidence on the descriptive behaviour of these sophisticated investors. Our study has implications for the burgeoning asset pricing literature that is trying to factor in information sparseness into asset pricing models. From a policy perspective, asset management practitioners may institute actions to safeguard the welfare of naive investors by checking the behavioural biases of professional asset managers.