Attention, Lottery, or Salience? The Impact of Extreme Payoffs on Chinese Mutual Fund Flows

Using a sample of Chinese mutual funds from 2004 to 2019, we find that investors direct flows into (out of) funds with salient upsides (downsides), controlling for a set of known determinants of fund flows. This effect is robust to alternative measures of key variables and is more pronounced for funds with larger individual ownership. This effect is not explained by individuals’ attention-driven purchases of attention-grabbing funds, funds’ lottery-like features, or the characteristics of funds’ underlying stocks. The salience theory, which argues that extreme payoffs distort individuals’ decision weights on risky asset choices only if these payoffs stand out relative to available alternatives and thus are salient, offers a plausible explanation for this effect.