I know it is hard to believe, but fund managers are also people. And because they are human, they suffer from the same behavioral prejudices as all of us. But how much exactly? In a terribly fascinating study, Richard Harris and Murat Mazibas investigated the monthly returns of 186,000 funds in all asset classes to find out.
With the help of data from 1990 to 2022, she fitted the parameters into the cumulative prospect theory for the real-life return. These parameters determine the degree of risk aversion, loss aversion and the prevalence of looking up risk behavior when they are confronted with losses. They also describe the extent to which subjective opportunities deviate from the objective probability of events, but I will skip that in this article.
Instead, I want to concentrate on the differences between fund managers who specialize in various activa classes. To start with the factor that is probably important, let’s look at loss aversion. The graph below shows the amount of money fund managers who are willing to sacrifice to prevent one dollar loss in their portfolios. The differences between activa classes are small (note the scale!), But still useful.
Managers of hedge funds and other alternative investments are on average more loss Avers than managers of different activa classes. Managers of money market funds follow in second place. This is intuitively useful, because the starting point of many alternative investments is to generate positively absolute returns, regardless of the market environment. That is why hedge funds probably tend to attract people who are of course more inclined to prevent losses. Similarly, the top priority of managers of money market funds ‘not to break the dollar’ as they say, ie have no drawing at all.
Among stock fund managers and asseta drugs, loss aversion seems to have been pronounced less, because it is part of the deal to experience repayments from time to time. If you can’t live with that, you are probably in the wrong job as an Equity Manager or a Multi-ASET Fund Manager.
Loss aversion among fund managers in various asset classes
Source: Harris and Mazibas (2025)
The second result that I want to concentrate is risk aversion and risk seeks behavior when they are confronted with losses. The Spreading Plot below shows that managers of money market funds and fund managers of alternative investments are more risk -suffering than shares or fixed -interest investors, which correlates with the differences in loss aversion (although loss aversion is not the same as risk aversion).
However, when dealing with losses, investors in money markets and alternative investments are also less risk-seeking, which means that they are less inclined to increase the risk of breaking and earning losses from the past. This type of risky, high-balance behavior is more common in equity, fixed-income income and multi-aslet fund managers.
This can be because these funds are usually managed against more volatile benchmarks and at the same time are more susceptible to investors’ samples if they stay behind for a while. That is why they can of course be inclined to somewhat increase the risks to compensate for losses from the past.
Risk aversion and risk behavior in losing
Source: Harris and Mazibas (2025)
There are also a few interesting – and suggestive – nuggets of data when analyzing fund managers on the size of the fund and the term of office, instead of focusing on the activa class. It is important that risk aversion and loss aversion do not seem to change as a term and age of the fund manager. This means that risk aversion and loss aversion are congenital characteristics of people who remain constant throughout their life cycle, or that fund managers do not learn from past errors and do not adjust their behavior, regardless of the consequences. You decide.
However, what I find interesting is that fund managers of the most important funds show different risk aversion and loss aversion than fund managers of all other funds. Managers of Megafonds with more than $ 100 billion in assets seem less loss Avers than the rest of the peer group and also less risk-avoiding. At the same time, they are also less risk-seeking when they are confronted with losses, ie they tend to take more risks than their colleagues when these risks are probably rewarded with a positive return, but are not in the fall of increasing risks when dealing with what a losing investment could be. And that is what you ideally want in a fund manager.
Whether this is the causal link (funds become mega funds because the managers are better), reverse causal connection (the biggest funds can attract the best fund managers), or just false correlation is unclear.
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