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How Does Simplified Disclosure Affect Individuals' Mutual Fund Choices?

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

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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File URL: http://www.nber.org/papers/w14859.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14859.

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Date of creation: Apr 2009
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Publication status: published as Chapter How Does Simplified Disclosure Affect Individuals' Mutual Fund Choices? Edited by John Beshears, James J. Choi, David Laibson and Brigitte C. Madrian in Explorations in the Economics of Aging Published by University of Chicago Press Published in print May 2011 | ISBN: 9780226903378 Published online February 2013 | e-ISBN: 9780226903385 | DOI: http://dx.doi.org/10.7208/chicago/9780226903385.003.0003
Handle: RePEc:nbr:nberwo:14859
Note: AG AP PE
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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, 02.
  2. Choi, James & Madrian, Brigitte & Laibson, David I., 2010. "Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds," Scholarly Articles 4686775, Harvard University Department of Economics.
  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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