Fooled by Success: How, Why, and When Disclosures Fail or Work in Mutual Fund Ads

Abstract

Mutual fund advertisers often highlight their funds’ past returns albeit with an SEC mandated disclosure. To ascertain whether the SEC disclosure is effective and how it could be improved, the authors conduct seven experiments of individuals’ choices of mutual funds with ads touting past success plus disclosures. These experiments lead to several findings: First, current SEC disclosures do not work because investors fall prey to the hot hand bias and believe that past performance trends will continue. Second, while investors comprehend the content of the SEC disclosure, they misapply it. Third, an alternate stronger, less ambiguous disclosure effectively attenuates investors’ preferences for funds with longer (vs. shorter) performance runs. Fourth, the authors also show that only a disclosure that directly relates to the beliefs that give rise to the hot hand bias overcomes peoples’ tendency to chase returns. Fifth, these findings generalize to the real estate context. This is the only research that shows that when the SEC disclosure found in mutual fund ads is pitted against the hot hand bias, the hot hand wins out. Yet, a strongly worded disclosure has some success at debiasing individuals. Implications for policy makers, practitioners, and consumers are discussed.

Here Comes the Sun: Present and Future Impact in Marketing and Public Policy Research

“…Another fortunate characteristic of our work is that it often provides an element of insight to educational efforts through its strong connection to policy. For example, Johnson, Tellis, and VanBergen (2022) offer critical takeaways for the SEC about mutual fund disclosures designed to educate investors. Their findings reveal that current disclosures can lead investors to chase potentially unrealistic and unsustainable returns, and that changes to disclosure mandates are needed to provide proper information and education to investors.…”

Key investor information disclosure regulation and retail mutual fund flows in the Finnish market

“…However, providing more information for retail investors is problematic because behavioural economics suggests that individuals have limited cognitive abilities, such as information perception and processing ability, to make informed investment decisions (Simon, 1955;Oehler et al, 2014). Thus, mandating additional information disclosure may be counterproductive by failing to mitigate biased decision-making (Johnson et al, 2021) and by contributing to information overload (Black, 2008;Ceravolo et al, 2019). Moreover, the theory of competition in retail financial product markets suggests that asset managers tend to make their products more complex to protect their market power (Carlin, 2009;deHaan, 2021).…”

“…As regards the content of disclosures, consumers are sensitive to how information is presented in the document (Ceravolo et al, 2019), including the way in which key metrics such as fees (Thorp et al, 2020) and risk/return profile (Bussoli et al, 2021) are presented. Further, investors rely on the past performance indicator in a short-form disclosure document despite the presence of a disclaimer stating its irrelevance as to predicting future returns (H€ usser and Wirth, 2014;Johnson et al, 2021). However, an investigation into a change in disclosure requirements with the goal of increasing the transparency of pension plan fees using real US market data by Badoer et al (2020) suggests that regulation can benefit retail investors whose fees reduced as a result.…”

“…, 2014). Thus, mandating additional information disclosure may be counterproductive by failing to mitigate biased decision-making (Johnson et al ., 2021) and by contributing to information overload (Black, 2008; Ceravolo et al. , 2019).…”

“…, 2021) are presented. Further, investors rely on the past performance indicator in a short-form disclosure document despite the presence of a disclaimer stating its irrelevance as to predicting future returns (Hüsser and Wirth, 2014; Johnson et al ., 2021). However, an investigation into a change in disclosure requirements with the goal of increasing the transparency of pension plan fees using real US market data by Badoer et al.…”