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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.

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File URL: http://www.qfrc.uts.edu.au/research/research_papers/rp326.pdf
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Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 326.

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Length: 40 pages
Date of creation: 01 Mar 2013
Date of revision:
Handle: RePEc:uts:rpaper:326
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  1. 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.
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  3. James Choi & David Laibson & Brigitte Madrian & Andrew Metrick, 2005. "Optimal Defaults and Active Decisions," Levine's Bibliography 666156000000000488, UCLA Department of Economics.
  4. Calvet, Laurent E. & Campbell, John Y. & Sodini, Paolo, 2006. "Down or Out: Assessing The Welfare Costs of Household Investment Mistakes," Working Paper Series 195, Sveriges Riksbank (Central Bank of Sweden).
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  6. Sumit Agarwal & Gene Amromin & Itzhak Ben-David & Souphala Chomsisengphet & Douglas Evanoff, 2014. "The Effectiveness of Mandatory Mortgage Counseling: Can One Dissuade Borrowers from Choosing Risky Mortgages?," NBER Working Papers 19920, National Bureau of Economic Research, Inc.
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  14. Angela A. Hung & Aileen Heinberg & Joanne K. Yoong, 2010. "Do Risk Disclosures Affect Investment Choice?," Working Papers 788, RAND Corporation.
  15. Glenn W. Harrison & Eric Johnson & Melayne M. McInnes & E. Elisabet Rutström, 2005. "Risk Aversion and Incentive Effects: Comment," American Economic Review, American Economic Association, vol. 95(3), pages 897-901, June.
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