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As easy as pie: How retirement savers use prescribed investment disclosures

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  • Bateman, Hazel
  • Dobrescu, Loretti I.
  • Newell, Ben R.
  • Ortmann, Andreas
  • Thorp, Susan

Abstract

Using a laboratory experiment, we study how retirement plan members choose investment options using five information items prescribed by regulators. We found that asset allocation information for pre-mixed investment options – normally presented as a pie chart or a table – had the largest impact on choices. Participants preferred investment options with more, and more evenly weighted, asset class allocations. This novel application of a 1/n strategy differs significantly from the existing findings of naïve diversification in ‘mix-it-yourself’ conditions where participants spread resources evenly across funds or categories. When asset allocation information was included, coefficients on return and risk information had unexpected signs, but when asset allocation was omitted, participants preferred options with high Sharpe ratios. We also demonstrate that none of the five prescribed information items was significant in explaining individual choices of more than 35% of participants. These findings highlight that information contained in prescribed investment disclosures might not be used in the manner intended by the regulator. The results raise important methodological questions about the way ‘user-friendly’ information prescribed by regulators is validated before being legislated.

Suggested Citation

  • Bateman, Hazel & Dobrescu, Loretti I. & Newell, Ben R. & Ortmann, Andreas & Thorp, Susan, 2016. "As easy as pie: How retirement savers use prescribed investment disclosures," Journal of Economic Behavior & Organization, Elsevier, vol. 121(C), pages 60-76.
  • Handle: RePEc:eee:jeborg:v:121:y:2016:i:c:p:60-76
    DOI: 10.1016/j.jebo.2015.10.020
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    References listed on IDEAS

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    Cited by:

    1. Michael P. Keane & Susan Thorp, 2016. "Complex Decision Making: The Roles of Cognitive Limitations, Cognitive Decline and Ageing," Economics Papers 2016-W10, Economics Group, Nuffield College, University of Oxford.
    2. repec:eee:hapoch:v1_661 is not listed on IDEAS
    3. repec:bla:ausecr:v:49:y:2016:i:4:p:483-493 is not listed on IDEAS

    More about this item

    Keywords

    Consumer finance; Diversification; Heuristics; Pensions; Choice experiment;

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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