Improved Mutual Fund Investment Choice Architecture
Year: 2018
Type: article
Abstract: Two choice architecture interventions were explored to debias investors' irrational preference for mutual funds with high past returns rather than funds with low fees. A simple choice task was used involving a direct trade-off between maximizing past returns and minimizing fees. In the first intervention, warning investors that “Some people invest based on past performance, but funds with low fees have the highest future results” was more effective than 3 other disclosure statements, including the U.S. financial regulator's, “Past performance does not guarantee future results.” The second intervention involved converting mutual fund annual percentage fees into a 10-year dollar cost equivalent. This intervention also improved investors' fee sensitivity, and remained effective even as past returns increased. Financially literate participants were surprisingly more likely to irrationally maximize past returns in their investment choices.
Source: Journal of Behavioral Finance
Authors: Philip W. S. Newall, Katie N. Parker
Institutions: University of Warwick, University College London
Language: English
Subfield: General Decision Sciences
Field: Decision Sciences
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2805023130