Associate Professor, Adam Craig's new paper, "A Picture is Worth a Thousand Dollars: Visual Aids Promote Investor Decisions," is set to be published in the Journal of the Association of Consumer Research's special issue on Financial Decision Making.
Summary: Retail investors often overpay for mutual funds that they use to save for retirement, education, and other financial goals. Can retail investors make better mutual fund decisions when they are alerted to a fund’s cost? Can mutual fund disclosure documents be improved with graphics that depict fee ranges? A new paper published in the Journal of the Association of Consumer Research suggests that consumers ignore fees when making mutual fund selection decisions but that graphics depicting the fund’s fee level help consumers make better investment decisions. Three controlled experiments, in which participants could receive bonus payments for making better choices, show that consumers select overly expensive mutual funds despite financial experts’ and policymakers’ guidance. When fee visuals, graphics that depict not just the fee but its relative price among other funds, supplement traditional informational materials, consumers make better decisions by selecting lower cost options. In selecting less expensive funds, consumers can save significantly more money over their lifetimes as the savings from high prices compound. This work should challenge the agencies and regulations that govern financial disclosure: current disclosure methods (i.e., long legal documents) can be greatly improved using easy-to-understand visuals that help investors make better decisions.
The paper is co-authored with Brian Scholl, Chief Economist, Office of the Investor Advocate, Securities and Exchange Commission and Alycia Chin, Senior Financial Economist, Office of the Investor Advocate, Securities and Exchange Commission.
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