Mutual Funds and Investor Choice: Paths to the 'Wizards of Advertising and Overconfidence'

Abstract

This article explores the relationships of mutual fund advertising and investor skill in making fund choices. Some key takeaways can be drawn from our analysis of the four factors affecting the relationship between mutual fund advertising and investors’ fund choices, and whether they lead investors down the path of the “wizards of overconfidence” or the path of the “wizards of advertising.”

Advertising appeals to investor emotions by resonating with current beliefs, not by providing information that enables more informed fund choices. Choices of unsophisticated investors are dominated by fund advertising - “the wizards of advertising.”

Sophisticated investors with self-assessed above-average investment skills believe they make superior choices of actively managed mutual funds that will outperform index funds. However, sophisticated investors are not superior investors, but overconfident investors - “the wizards of overconfidence.”

Mutual funds will be forced to provide useful objective information if investors “demand it,” but will this ever happen? The test of this change is when the traditional model of persuasion replaces the behavioral model in best matching investor perceived needs in making fund choices.

Keywords: Mutual Funds, Sophisticated Investors, Overconfidence, Unsophisticated Investors, Fund Advertising, Financial Literacy, Revealed Preferences, Investor Choice, Advertising as Persuasion

JEL Classification: G2, G23, G28