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

James Choi, David Laibson and Brigitte Madrian

Yale School of Management Working Papers from Yale School of Management

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.

Keywords: mutual funds; S&P; index funds; fund portfolios (search for similar items in EconPapers)
Date: 2008-04-25, Revised 2008-05-05
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https://repec.som.yale.edu/icfpub/publications/2369.pdf (application/pdf)

Related works:
Journal Article: Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds (2010)
Working Paper: Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds (2010)
Working Paper: Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds (2008)
Working Paper: Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:ysm:wpaper:amz2369

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