Alphabeticity Bias in 401(k) Investing

Doellman, Thomas W.; Itzkowitz, Jennifer; Itzkowitz, Jesse; Sardarli, Sabuhi

doi:10.1111/fire.12188

Cited by 10 publications

(12 citation statements)

References 53 publications

(72 reference statements)

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“…Investment alternatives are normally listed in alphabetical order (Doellman et al , 2019). Even though a list of investment choices can easily be re-ordered based on individual stock characteristics, people more often rely on the default (status quo) list given to them (Kahneman et al ., 1991).…”

Section: Literature Reviewmentioning

confidence: 99%

Probing the impact of recognition-based heuristic biases on investment decision-making and performance

Ahmad

Abbass

2022

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PurposeThis study aims to explore and clarify the mechanism by which recognition-based heuristic biases influence the investment decision-making and performance of individual investors, with the mediating role of fundamental and technical anomalies.Design/methodology/approachThe deductive approach was used, as the research is based on behavioral finance's theoretical framework. A questionnaire and cross-sectional design were employed for data collection from the sample of 323 individual investors trading on the Pakistan Stock Exchange (PSX). Hypotheses were tested through the structural equation modeling (SEM) technique.FindingsThe article provides further insights into the relationship between recognition-based heuristic-driven biases and investment management activities. The results suggest that recognition-based heuristic-driven biases have a markedly positive influence on investment decision-making and negatively influence the investment performance of individual investors. The results also suggest that fundamental and technical anomalies mediate the relationships between the recognition-based heuristic-driven biases on the one hand and investment management activities on the other.Practical implicationsThe results of the study suggested that investment management activities that rely on recognition-based heuristics would not result in better returns to investors. The article encourages investors to base decisions on investors' financial capability and experience levels and to avoid relying on recognition-based heuristics when making decisions related to investment management activities. The results provides awareness and understanding of recognition-based heuristic-driven biases in investment management activities, which could be very useful for decision-makers and professionals in financial institutions, such as portfolio managers and traders in commercial banks, investment banks and mutual funds. This paper helps investors to select better investment tools and avoid repeating the expensive errors that occur due to recognition-based heuristic-driven biases.Originality/valueThe current study is the first to focus on links recognition-based heuristic-driven biases, fundamental and technical anomalies, investment decision-making and performance of individual investors. This article enhanced the understanding of the role that recognition-based heuristic-driven biases plays in investment management. More importantly, the study went some way toward enhancing understanding of behavioral aspects and the aspects' influence on investment decision-making and performance in an emerging market.

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Section: Literature Reviewmentioning

confidence: 99%

Probing the impact of recognition-based heuristic biases on investment decision-making and performance

Ahmad

Abbass

2022

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“…Thus, they may be subject to greater influence from fund advisers and marketing effects. Alternatively, as explained in Doellman et al (2019), financial education may fail to protect more educated investors, such as financial professionals, from being fooled by the name bias.…”

Section: Retail Versus Institutional Fundsmentioning

confidence: 99%

“…Jacobs and Hillert (2016) and Doellman et al. (2019) show that funds ranked at the top of an alphabetical listing attract relatively larger inflows. El Ghoul and Karoui (2021) show that changing fund names to sustainability‐related monikers increases fund flows.…”

Section: Introductionmentioning

confidence: 99%

“…Costly search arguments suggest that investors do not fully investigate the universe of investable opportunities (Bettman et al., 1998; Sirri & Tufano, 1998); instead, they look for tools to reduce search efforts and costs (Tversky & Kahneman, 1973). Among these tools, the literature shows that fund names capture investor attention and that name fluency (Green & Jame, 2013), name changes (Cooper et al., 2005; El Ghoul & Karoui, 2021; Espenlaub et al., 2017), and alphabetical rank (Doellman et al., 2019; Jacobs & Hillert, 2016) influence investment decisions. We confirm that distance between fund and family names is equally relevant to investor decisions.…”

Section: Introductionmentioning

confidence: 99%

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Fund names versus family names: Implications for mutual fund flows

Karoui

Ghoul

2022

The Financial Review

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An emerging literature shows that investors are sensitive to mutual fund names. Using a sample of US equity funds over the period 1993–2017, we provide evidence that funds with names that are closer to those of their families attract more flows and display a stronger performance‐flow relationship. This name bias is more persistent among old and large fund families and in retail funds. Our results are in line with the literature on social biases and costly searches and show that seemingly innocuous differences in fund attributes, such as fund names, can translate into significant differences in investor decisions.

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“…Many plan participants seem to exhibit limited effort, or even no effort, when making investment decisions in their retirement plan. For instance, Doellman et al (2019) provide evidence that the average plan participant resorts to simply choosing funds from the top of the plan menu list. Many other employees follow the path of least resistance and rely on default decisions made by their employers (Carroll et al, 2009; Choi et al, 2002).…”

Section: Us DC Plans: the Fiduciary Default Allocation Issuementioning

confidence: 99%

Menu simplification for portfolio selection under short‐sales constraints

AitSahlia

Doellman

Sardarli

2022

Euro Fin Management

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We introduce a risk-reduction-based procedure to identify a subset of funds with a resulting opportunity set that is at least as good as the original menu when short-sales are imposed. Relying on Wald tests for mean-variance spanning, we show that the better results for the subset can be explained by a higher concentration of covariance entries between its assets, ultimately leading to smaller Frobenius norms of the associated matrices. With data on US-defined contribution plans, where participants have limited financial literacy, tend to be overwhelmed and prefer to make decisions among fewer choices, we obtain a 75% average reduction.

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Alphabeticity Bias in 401(k) Investing

Cited by 10 publications

References 53 publications

Probing the impact of recognition-based heuristic biases on investment decision-making and performance

Probing the impact of recognition-based heuristic biases on investment decision-making and performance

Fund names versus family names: Implications for mutual fund flows

Menu simplification for portfolio selection under short‐sales constraints

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