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Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds

James Choi, David Laibson and Brigitte Madrian

No 12261, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Experimental subjects allocate $10,000 across four S&P 500 index funds. Subject rewards depend on the chosen portfolio's subsequent return. Because the investments are not actually intermediated by the fund companies, portfolio returns are unbundled from non-portfolio services. The optimal portfolio therefore invests 100% in the lowest-cost fund. Nonetheless, subjects overwhelmingly fail to minimize fees. When we make fees transparent and salient, portfolios shift towards cheaper funds, but fees are still not minimized. Instead, subjects place high weight on normatively irrelevant historical returns. Subjects who choose high-cost index funds are relatively much less confident about their asset allocation choices.

JEL-codes: D14 D18 D43 D83 (search for similar items in EconPapers)
Date: 2006-05
New Economics Papers: this item is included in nep-bec, nep-exp, nep-fin and nep-fmk
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

Published as Choi, James J., David Laibson, and Brigitte C. Madrian. “Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds." Review of Financial Studies 23, 4 (April 2010): 1405-1432.

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Journal Article: Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds (2010) Downloads
Working Paper: Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds (2010) Downloads
Working Paper: Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds (2008) Downloads
Working Paper: Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds (2008) Downloads
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