Are Mutual Fund Investors Bayesian Learners

Many financial models assume that financial market participants learn following Bayes’ rule. In this paper, we use a new measure of investor disagreement to study the learning speed of mutual fund investors about manager skill. Although the precision of estimates of manager skill increases quickly over time, investors’ disagreement about manager skill does not decline for many years. Investors’ non-Bayesian learning is not due to the inconsistency of potential performance measures used by investors, or investing frictions, but is likely due to limited attention. Overall, our results suggest market participants learn much more slowly than currently assumed.