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How Does Simplified Disclosure Affect Individuals' Mutual Fund Choices?

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Author Info

  • Beshears, John

    (Harvard University)

  • Choi, James

    (Yale University)

  • Laibson, David

    (Harvard University)

  • Madrian, Brigitte C.

    (Harvard University)

Abstract

We use an experiment to estimate the effect of the SEC's Summary Prospectus, which simplifies mutual fund disclosure. Our subjects chose an equity portfolio and a bond portfolio. Subjects received either statutory prospectuses or Summary Prospectuses. We find no evidence that the Summary Prospectus affects portfolio choices. Our experiment sheds new light on the scope of investor confusion about sales loads. Even with a one-month investment horizon, subjects do not avoid loads. Subjects are either confused about loads, overlook them, or believe their chosen portfolio has an annualized log return that is 24 percentage points higher than the load-minimizing portfolio.

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Bibliographic Info

Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp09-016.

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Date of creation: Jun 2009
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Handle: RePEc:ecl:harjfk:rwp09-016

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  1. James J Choi & David Laibson & Brigitte C Madrian, 2008. "Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds," Levine's Working Paper Archive 122247000000002014, David K. Levine.
  2. Edwin J. Elton & Martin J. Gruber & Jeffrey A. Busse, 2004. "Are Investors Rational? Choices among Index Funds," Journal of Finance, American Finance Association, vol. 59(1), pages 261-288, 02.
  3. Shlomo Benartzi & Richard H. Thaler, 1999. "Risk Aversion or Myopia? Choices in Repeated Gambles and Retirement Investments," Management Science, INFORMS, vol. 45(3), pages 364-381, March.
  4. Richard H. Thaler & Shlomo Benartzi, 2001. "Naive Diversification Strategies in Defined Contribution Saving Plans," American Economic Review, American Economic Association, vol. 91(1), pages 79-98, March.
  5. Cronqvist, Henrik, 2006. "Advertising and Portfolio Choice," Working Paper Series 2006-16, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
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