Keywords

index fund fees, investor behavior, fee salience

Abstract

Experimental subjects review four S&P 500 index fund prospectuses and then allocate $10,000 across those funds. We randomly select subjects to be paid for their subsequent portfolio performance. Subjects cannot access any non-portfolio services such as financial advice from their selected funds. Nevertheless, they overwhelmingly fail to minimize their index fund fees. When we make fund fees salient and transparent, subjects’ portfolios shift towards lower-fee index funds, but over 80% still do not invest all of their money in the lowest-fee fund. When funds’ annualized returns since inception are made salient, portfolios shift towards index funds with higher returns since inception, even though variation in these returns is irrelevant for forecasting future returns. We present evidence that investors in high-cost index funds sense that they may be making a mistake.

Original Publication Citation

“Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds.” 2010. Review of Financial Studies, 23(4):1405-1432 (with James J. Choi and David Laibson). http://doi:10.1093/rfs/hhp097

Document Type

Peer-Reviewed Article

Publication Date

2010

Publisher

Review of Financial Studies

Language

English

College

Marriott School of Business

Department

Finance

University Standing at Time of Publication

Full Professor

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