Chapter 29: Mutual Funds and Individual Investors: Advertising and Behavioral Issues

H. Kent Baker, and Victor Ricciardi, eds., Investor Behavior: The Psychology of Financial Planning and Investing, pp. 533-553. Hoboken, NJ: John Wiley & Sons, 2014

Robert H. Smith School Research Paper No. RHS 2373707

22 Pages Posted: 2 Jan 2014 Last revised: 16 Feb 2017

See all articles by John A. Haslem

John A. Haslem

University of Maryland - Robert H. Smith School of Business; University of Maryland - Robert H. Smith School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 18, 2015

Abstract

The purpose of this chapter is to review interactions between mutual funds and individual investors in choosing equity mutual funds. Probably the largest question is why both sophisticated and unsophisticated investors persist in investing in actively managed funds that generally result in underperformance. Actively managed funds have a long history of spending money on advertising because they find that it results in increasing assets under management. Fund management companies realize that investors chase past performance in the mistaken belief that historical returns predict future investment performance. Funds further take advantage of investors by increasing advertising when past performance is high. Advertising encourages many investors to make fund choices because they are inexperienced, unaware, and have low financial literacy, including a lack of knowledge of both transparent and obscure fund commissions, expenses, and charges. Any persistence in high fund performance is also much more likely attributable to luck than to portfolio manager’s expertise. The Securities and Exchange Commission (SEC) has also failed to prohibit performance advertising or to require it to be understandable.

The remaining sections provide a discussion of the following topics: (1) advertising and performance; (2) advertising, expenses, and flows; (3) advertising, emotions, and choice; (4) behavioral persuasion in advertising and choice; (5) education, financial knowledge, and choice; (6) emotions, behavior, and choice; (7) emotions, behavioral finance, and choice; (8) financial literacy and active management; (9) price and performance sensitivity and repricing; and (10) sentiment contrarian behavior and actual performance. The final section provides a brief summary and conclusions. Haslem (2003, 2010a) discusses funds in depth, including risk and performance.

Suggested Citation

Haslem, John A. and Haslem, John A., Chapter 29: Mutual Funds and Individual Investors: Advertising and Behavioral Issues (May 18, 2015). H. Kent Baker, and Victor Ricciardi, eds., Investor Behavior: The Psychology of Financial Planning and Investing, pp. 533-553. Hoboken, NJ: John Wiley & Sons, 2014, Robert H. Smith School Research Paper No. RHS 2373707, Available at SSRN: https://ssrn.com/abstract=2373707

John A. Haslem (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

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University of Maryland - Robert H. Smith School of Business ( email )

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