Chinese mutual fund investors tend to chase funds with better historical performance and higher idiosyncratic volatility, leading to huge losses when fund performance reverses in the future. By incorporating the uncertainty of the fund performance generating process into the investor learning model, this paper theoretically shows that investors with insufficient financial literacy are subject to the optimism bias while assessing the fund’s skills, leading to an asymmetric impact of the fund’s idiosyncratic volatility on fund flow-performance sensitivity: when fund performance is better (poorer), the higher the fund’s idiosyncratic volatility, the higher (lower) the fund flow-performance sensitivity. The results make the fund’s idiosyncratic volatility able to explain the fund flow-performance convexity puzzle: the higher the fund’s idiosyncratic volatility, the more significant the fund flow-performance convexity relationship. Furthermore, by decomposing the fund’s idiosyncratic volatility into a persistent component (long-run idiosyncratic volatility) and a short-term volatile component (short-run idiosyncratic volatility), this study finds that only the long-run idiosyncratic volatility has a significant impact on the fund flow-performance convexity while the short-run idiosyncratic volatility does not. The long-run idiosyncratic volatility does not help to improve the predictive power of historical fund performance on future performance. It also has a more significant impact on individual investors' fund flows, suggesting that this effect is due to investors' behavioral biases. This paper validates these findings based on the data of the Chinese mutual fund market. The research in this paper has important policy implications: regulation of fund companies' marketing should be strengthened to avoid funds going viral. More importantly, investor education should be vigorously strengthened to enhance investors’ sophistication in order to circumvent the optimism bias when learning the fund’s skills for investors with insufficient financial literacy.