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How Does Simplified Disclosure Affect Individuals' Mutual Fund Choices?

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  • John Beshears
  • James J. Choi
  • David Laibson
  • Brigitte C. Madrian

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.

Suggested Citation

  • John Beshears & James J. Choi & David Laibson & Brigitte C. Madrian, 2009. "How Does Simplified Disclosure Affect Individuals' Mutual Fund Choices?," NBER Working Papers 14859, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:14859
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    1. 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, February.
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    4. James J. Choi & David Laibson & Brigitte C. Madrian, 2010. "Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds," Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1405-1432, April.
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    Cited by:

    1. Dennis Vrecko & Thomas Langer, 2013. "What Are Investors Willing to Pay to Customize Their Investment Product?," Management Science, INFORMS, vol. 59(8), pages 1855-1870, August.
    2. 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.
    3. Newall, Philip Warren Stirling & Parker, Katie, 2017. "Improved mutual fund investment choice architecture," OSF Preprints qknjt, Center for Open Science.
    4. James J. Choi & David Laibson & Brigitte C. Madrian, 2010. "Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds," Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1405-1432, April.
    5. Eduardo Fajnzylber & Gonzalo Reyes, 2015. "Knowledge, Information, and Retirement Saving Decisions: Evidence from a Large-Scale Intervention in Chile," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Spring 20), pages 83-117, February.
    6. Sane, Renuka & Halan, Monika, 2017. "Misled and mis-sold: financial misbehaviour in retail banks?," Journal of Comparative Economics, Elsevier, vol. 45(3), pages 429-444.
    7. Keane, M.P. & Thorp, S., 2016. "Complex Decision Making," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 661-709, Elsevier.
    8. Gui, Zhengqing & Huang, Yangguang & Zhao, Xiaojian, 2021. "Whom to educate? Financial literacy and investor awareness," China Economic Review, Elsevier, vol. 67(C).
    9. Halan, Monika & Sane, Renuka, 2017. "Regulating consumer finance: Do disclosures matter? The case of life insurance," Working Papers 17/212, National Institute of Public Finance and Policy.
    10. Steiner, Michael & Wiegand, Nico & Eggert, Andreas & Backhaus, Klaus, 2016. "Platform adoption in system markets: The roles of preference heterogeneity and consumer expectations," International Journal of Research in Marketing, Elsevier, vol. 33(2), pages 276-296.
    11. Beshears, John & Kosowsky, Harry, 2020. "Nudging: Progress to date and future directions," Organizational Behavior and Human Decision Processes, Elsevier, vol. 161(S), pages 3-19.
    12. Thorp, S. & Bateman, H. & Dobrescu, L.I. & Newell, B.R. & Ortmann, A., 2020. "Flicking the switch: Simplifying disclosure to improve retirement plan choices," Journal of Banking & Finance, Elsevier, vol. 121(C).
    13. Andrew Caplin & Daniel J. Martin, 2020. "Framing, Information, and Welfare," NBER Working Papers 27265, National Bureau of Economic Research, Inc.
    14. Florencia Marotta-Wurgler, 2012. "Does Contract Disclosure Matter?," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 168(1), pages 94-119, March.
    15. Angela A. Hung & Aileen Heinberg & Joanne K. Yoong, 2010. "Do Risk Disclosures Affect Investment Choice?," Working Papers WR-788, RAND Corporation.
    16. Hillenbrand, Adrian & Schmelzer, André, 2017. "Beyond information: Disclosure, distracted attention, and investor behavior," Journal of Behavioral and Experimental Finance, Elsevier, vol. 16(C), pages 14-21.
    17. Badoer, Dominique C. & Costello, Charles P. & James, Christopher M., 2020. "I can see clearly now: The impact of disclosure requirements on 401(k) fees," Journal of Financial Economics, Elsevier, vol. 136(2), pages 471-489.
    18. Meyer, Steffen & Urban, Linda & Ahlswede, Sophie, 2016. "Does feedback on personal investment success help?," SAFE Working Paper Series 157, Leibniz Institute for Financial Research SAFE.

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    More about this item

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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