The Frequency of Outperformance and Investment Decisions

Does frequent outperformance cause investors to buy? If so, do investors have a preference to outperform most of the time, or does frequent outperformance bias beliefs about the risk and return of an asset? In several randomized experiments, we show that retail investors purchase frequently outperforming assets, even at the cost of large infrequent underperformance and when assets are first-order stochastically dominated. An experiment with asset management professionals confirms that a large fraction of financial intermediaries anticipates investors' attraction to frequent outperformers. The evidence supports a belief-based mechanism, where frequent outperformance causes overoptimism about an asset's risk and return. Our findings have implications for fund management, the design and regulation of structured products, and for the debate on the (ir)relevance of systematic risk for portfolio choice and asset pricing