Heuristics in Mutual Fund Consumers' Willingness‐to‐Invest: An Experimental Approach

Abstract

This paper improves the understanding of heuristics in the choice of mutual funds. We analyze the effect of price‐quality relationship and anchors as heuristics on the evaluation of the willingness‐to‐invest. We perform two studies with graduate students who possess a medium–high level of financial literacy in Chile. In the first study, we find that willingness‐to‐invest increases (decreases) when subjects observe (do not observe) in the market a positive relationship between expense ratios (price) and service quality. In the second study, in the presence of an anchor, the reference price obtained by individuals from the market information loses relevance and the anchor effect predominates. Our results confirm that participants, as consumers of financial services, apply heuristics as groundwork for their investment decisions. These heuristics as a decision making process are useful but do not always lead to the choice of the lowest cost alternative with the highest possible service quality.

How heuristics in judgement influence the securities investment decision process

“…The objective of this paper is to follow up the findings by Lavin et al ( 2019 ), who show that consumers regularly encounter difficulties when investing in securities and, as a result, make their investment decisions under the influence of behavioral biases. They observe participants to be guided by contextual information, such as marketable annual expense ratios, or to evaluate an investment fund’s quality in relation to the expense ratio of previous investments.…”

“…In general, the literature indicates that people tend to rely on the first information they receive and make their financial decisions dependent on it (Shah et al, 2018 ). While the anchor heuristic was originally tested by Tversky and Kahneman ( 1974 ) in terms of estimates for mathematical equations, Lavin et al ( 2019 ) investigate its impact on the willingness of retail customers to invest in specific investment products. Lacking complete information on quality and prices, investors make their investment decisions depending on predetermined contextual information, i.e., fictitious offer prices and a fictitious average market price, which serves as anchor value.…”

“…They observe participants to be guided by contextual information, such as marketable annual expense ratios, or to evaluate an investment fund’s quality in relation to the expense ratio of previous investments. While Lavin et al ( 2019 ) analyzed how investors are guided by biases under laboratory conditions, the present paper analyzes the effects of heuristics in real-life financial consulting sessions based on the reasons described above.…”

Cognitive bias, intuitive attributes and investment decision quality in commercial real estate in Uganda

“…Gigerenzer and Wolfgang (2011) suggest that heuristic biases are instrumental in circumstances that need a quick response to an investment decision opportunity and maximize the expected utility. Correspondingly, Lavin et al (2019) state that people use cognitive heuristics in uncertain situations to advance a quality investment decision.…”

Intelligent Predictive Analytics for Sustainable Business Investment in Renewable Energy Sources

“…An important criterion involved in willingness to invest is associated with the economic dimension of such investments. By understanding the logic behind selecting an investment portfolio, it was signified that investment interest rises whenever individuals perceive a positive relationship between price and quality [11]. However, according to Oyewole et al, this argumentation could not be verified for emerging economies for Nigeria [5].…”