As Easy as Pie: How Retirement Savers use Prescribed Investment Disclosures

We report the results of two laboratory experiments that study how university student and staff participants chose retirement savings investment options using ‘user-friendly’ information prescribed by regulators. We demonstrate that choices of more than 20% of participants cannot be predicted using any of the prescribed information items but that 30% of participants used all, or almost all, items, frequently in unexpected ways. A pie-chart showing asset allocation had the largest marginal impact on investment choices. Participants preferred options with more segmented pies (lower concentration) and with equally sized segments (lower deviation froma 1/n allocation). This choice behavior is consistent with the application of a simple diversification heuristic. Participants cannot choose more than one investment but are guided by the extent to which a pre-mixed investment option appears evenly balanced across asset classes. This novel application of a 1/n strategy is distinct from existing findings of naïve diversification in ‘mix-it-yourself’ conditions where participants spread resources evenly across funds or categories. The results highlight that information contained in prescribed investment disclosures may not be used in the manner intended by the regulator. The results also pose interesting methodological questions about the way ‘user-friendly’ information prescribed by regulators is validated before being legislated.