Cognitive Skills and Economic Preferences in the Fund Industry

By running a battery of experiments with fund managers, we investigate the impact of cognitive skills and economic preferences on their professional decisions. First, we find that fund managers’ risk tolerance positively correlates with fund risk when accounting for fund benchmark, fund category, and other controls. Second, we show that fund managers’ ambiguity tolerance positively correlates with the funds’ tracking error from the benchmark. Finally, we report that cognitive skills do not explain fund performance in terms of excess returns. However, we do nd that fund managers with high cognitive reection abilities compose funds at lower risk.