How does prior work experience affect investment choices? This question is crucial for our understanding of financial markets – especially the investment industry. We are proud to announce that the paper “The Investment Value of Mutual Fund Managers’ Experience outside the Financial Sector” by Monika Gehde-Trapp (University of Hohenheim) and her colleagues Gjergji Cici (The College of William & Mary), Marc-André Göricke (University of Cologne) and Prof. Alexander Kempf (University of Cologne) has been accepted for publication at the Review of Financial Studies (impact factor 2016: 3.689, H-index 135).

 Let the ex-physician manage your fund, but…

The paper examines the risk-adjusted performance of fund managers who previously worked outside the financial sector. Consider a physician who becomes a fund manager after working in a medical department. We show that such fund managers outperform in their experience industries. Hence, professional investors with prior work experience outside of the financial sector can translate this experience into excess returns for investors. In industries in which they have no experience, these “outside” managers generate average performance. So, the lack of experience in the financial sector does not negatively affect their performance.

…do not trust your doctor to pick stocks

Interestingly, this result is in stark contrast to what other studies find for retail investors: They usually underperform with their investment in industries where they have work experience. Why? The empirical evidence says that they are overconfident, making risky bets that do not pay off on average (“familiarity bias”). Hence, the working environment within a fund family appears to protect fund investors from the negative effects of such biases.

Author: Monika Gehde-Trapp