Frog In The Boiling Water:Information Dispersion And Mutual Fund Flow

According to the "boiling the frog in warm water" allusion,a frog in a pot heated slowly enough becomes unresponsive and eventually dies.Existing capital market evidence shows that this effect also exists among stock investors.For investment targets with slower and more continuous rate of return changes,stock investors will be more sluggish in their responses,and cannot quickly take corresponding investment decisions.The reason behind this phenomenon comes from the limited attention theory.Attention is a scarce resource for human beings.When facing a capital market with a wide variety of products and many products,investors can only focus on a small part of investment products,which leads them to ignore some relatively small and mild changes.And when these changes are discovered in the future,investors will overreact,damaging momentum profits and generating behavioral biases.Behavioral biases refer to behavioral traits that investors possess that have a high probability of harming investment outcomes.The above stock market evidence suggests that the "boiled frog" effect can lead to behavioral biases,and the reason behind it comes from limited attention.However,most of the existing research discusses the impact of limited attention on the stock market,while ignoring the fund market.This does not mean that this effect does not exist in the fund market.Compared with the stock market,the fund market is also very important.In recent years,among the active equity funds in the Chinese market,the proportion of individual fund investors has continued to grow overall,reaching87.7% by the end of 2021,far exceeding institutional investors.However,the proportion of individual investors in the fund market continues to increase,the degree of irrationality increases,and the possibility of behavioral deviations is also greater.According to statistics,from 2005 to 2020,the income gap between stock funds and investors in the Chinese market was as high as 5.73%.The reason behind this phenomenon is not fund selection ability,but behavioral bias.Therefore,to avoid investor behavior deviation and promote the sustainable development of China’s fund market,it is necessary to explore whether the "boiled frog" effect also exists in the fund market.Specifically,this paper uses the information dispersion index to measure the discrete characteristics of information flow and brings the limited rational factor of information dispersion into the scope of equity fund investment for in-depth research.At the same time,the fund flow and fund flow-performance sensitivity are used to describe the behavior of fund investors.The results show that information dispersion has a significant negative impact on fund flow and fund flow-performance sensitivity,which will affect the behavior of fund investors and produce behavioral deviations.This effect is consistent with the "limited attention" mechanism proposed by existing studies on information dispersion.The lower the information dispersion,the more continuous the information,the less responsive investors are in the current period,and the higher the sensitivity of the fund’s future capital flow to current performance,leading to future overreactions that damage future profits.At the same time,this effect is also very robust and cannot be explained by various common factors affecting fund flows and flow-performance sensitivities.Furthermore,because a fund is a portfolio,this paper speculates that the effect of information dispersion in the stock market may explain its effect in the fund market.It is found that the influence of information dispersion in the fund market is like that in the stock market,but not completely the same,which may be related to the different trading mechanisms in the fund market and the stock market.The findings of this article help to understand the behavioral deviations of fund investors due to limited attention,to carry out targeted investor education,avoid investors’ cognitive biases and emotional biases,etc.,protect the interests of investors,promote the long-term development of the industry,and help China’s capital market to mature.