Do Sophisticated Investors Believe in the Law of Small Numbers?

Baquero, Guillermo; Verbeek, Marno

doi:10.2139/ssrn.891309

Cited by 11 publications

(7 citation statements)

References 36 publications

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“…Bordalo, Gennaioli and Shleifer [8], Koszegi and Szeidl [42], Gabaix [24] and Pavan [49] for alternative behavioral modelling touching on targeted attention, and Di Maggio and Pagano [16] for a model of disclosure in which investors have different abilities to process complex information. 10 Benartzi [6] shows that employees' investment in company stock depends heavily on past returns (and that is not correlated to future returns); Greenwood and Nagel [25] document that inexperienced fund managers contributed to the Internet bubbles by chasing trends; Baquero and Verbeek [3] show that money tend to flow from poorly performing hedge funds to funds with good past performance (and this does not improve future returns). A common feature in these examples is that agents choose their investment strategy by overextrapolating from the limited amount of data they observe.…”

Section: Overextrapolationmentioning

confidence: 99%

“…The firm can choose to make a very simple statement, a single number summarizing the overall profitability of the firm, or a more complicated statement, a large set of numbers describing the profitability of each single activity. 3 Under this metaphor, our key assumption is that firms are able to package activities in the firm as they wish, but not to hide them. All activities must be reported, and they cannot be made more or less visible to investors.…”

Section: Introductionmentioning

confidence: 99%

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Financial reporting and market efficiency with extrapolative investors

Bianchi

Jéhiel

2015

Journal of Economic Theory

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International audienceWe model a financial market in which companies engage in strategic financial reporting knowing that investors only pay attention to a randomly drawn sample from firms' reports and extrapolate from this sample. We investigate the extent to which stock prices differ from the fundamental values, assuming that companies must report all their activities but are otherwise free to disaggregate their reports as they wish. We show that no matter how large the samples considered by investors are, a monopolist can induce a price of its stock bounded away from the fundamental. Besides, increasing the number of companies competing to attract investors may exacerbate the mispricing of stocks

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Section: Overextrapolationmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Financial reporting and market efficiency with extrapolative investors

Bianchi

Jéhiel

2015

Journal of Economic Theory

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“…Berk and Green (2004) provide a partial equilibrium model in which investors learn the ability level of fund managers from observing past performances. Baquero and Verbeek (2006) find empirical evidence, indicating that investors base their hiring and firing decision of fund managers on past performance and the mistaken belief in the law of small numbers.…”

Section: A Model Setupmentioning

confidence: 99%

Fund Flows Inducing Mispricing of Risk in Competitive Financial Markets

Stahmer

2015

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means -electronic, mechanical, photocopying, recording, or otherwise -without the permission of ESMT. JEL classification: D53, D80, G01, G02, G11, G12, G20 * European School of Management and Technology (ESMT) Berlin, Germany, e-mail: axel.stahmer@esmt.org. Special thanks are due to Joerg Rocholl and Paul Heidhues for their extraordinary support and many useful comments that helped improve this paper. I am grateful to the ESMT and Humboldt University seminar participants, in particular Guillermo Baquero and Sascha Steffen as well as Christoph Wagner, Dora Simroth and Benedikt Meyer-Bretschneider for their constructive input. All errors are my own. I also wish to thank the JP Morgan team, which helped develop the paper idea. Terms of use: Documents in

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“…After controlling for survivorship bias, Baquero, Verbeek, and Horst (2005) find that hedge fund performance persists significantly for only one quarter. Using quarterly hedge fund performance, Baquero and Verbeek (2007) find that sophisticated investors exhibit a hot-hand bias. Funds with longer histories of success experience higher future success and greater flows of investment capital.…”

Section: Persistencementioning

confidence: 99%

VC Fund Financial Performance: The Relative Importance of IPO and M&A Exits and Exercise of Abandonment Options

Smith¹,

Pedace²,

Sathe³

2011

Financial Management

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By combining data from two sources, we are able to examine how fund financial performance is related to fund outcomes (initial public offering [IPO] and merger & acquisition (M&A) percentages) and abandonment practices. We also are able to relate fund performance to the track record of the venture capital firm. Our primary findings include: 1) fund IPO and M&A outcomes are statistically significantly related to financial performance, 2) M&A success is around 60% to 80% as important as IPO success in explaining performance, 3) except among the top performers, funds with aggressive exercise of abandonment options outperform those that continue to support a large percentage of their initial investments, and 4) prior performance of the firm, in terms of success percentages and abandonment practices, is significantly related to fund performance. Results are robust to controlling for selection bias of the reporting entities, as well as biases related to looking back at the performance of earlier funds survivorship, and attrition. Quantile regression estimates establish that our results hold across the full range of realized performance levels.

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Do Sophisticated Investors Believe in the Law of Small Numbers?

Cited by 11 publications

References 36 publications

Financial reporting and market efficiency with extrapolative investors

Financial reporting and market efficiency with extrapolative investors

Fund Flows Inducing Mispricing of Risk in Competitive Financial Markets

VC Fund Financial Performance: The Relative Importance of IPO and M&A Exits and Exercise of Abandonment Options

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