Why do retail investors make costly mistakes? An experiment on mutual fund choice

There is mounting evidence that retail investors make predictable, costly investment mistakes, including underinvestment, naïve diversification, and payment of excessive fund fees. Over the past thirty-five years, however, participant-directed 401(k) plans have largely replaced professionally managed pension plans, requiring unsophisticated retail investors to navigate the financial markets themselves. Policy-makers have struggled with regulatory interventions designed to improve the quality of investment decisions without a clear understanding of the reasons for investor mistakes. Absent such an understanding, it is difficult to design effective regulatory responses. This article offers a first step in understanding the investor decision-making process. We use an internet-based experiment to disentangle possible explanations for inefficient investment decisions. The experiment employs a simplified construct of an employee’s allocation among the options in a retirement plan coupled with technology that enables us to collect data on the specific information that investors choose to view. In addition to collecting general information about the process by which investors choose among mutual fund options, we employ an experimental manipulation to test the effect of an instruction on the importance of mutual fund fees. Pairing this instruction with simplified fee disclosure allows us to distinguish between motivation-limits and cognition-limits as explanations for the widespread findings that investors ignore fees in their investment decisions. Our results offer partial but limited grounds for optimism. On the one hand, within our simplified experimental construct, our subjects allocated more money, on average, to higher-value funds. Furthermore, subjects who received the fees instruction paid closer attention to mutual fund fees and allocated their investments into funds with lower fees. On the other hand, the effects of even a blunt fees instruction were limited, and investors were unable to identify and avoid clearly inferior fund options. In addition, our results suggest that excessive, naïve diversification strategies are driving many investment decisions. Although our findings are preliminary, they suggest valuable avenues for future research and important implications for regulation of retail investing

Constraining Dark Matter-Neutrino Interactions using the CMB and Large-Scale Structure

We present a new study on the elastic scattering cross section of dark matter (DM) and neutrinos using the latest cosmological data from Planck and large-scale structure experiments. We find that the strongest constraints are set by the Lyman-alpha forest, giving sigma_{DM-neutrino} < 10^{-33} (m_DM/GeV) cm^2 if the cross section is constant and a present-day value of sigma_{DM-neutrino} < 10^{-45} (m_DM/GeV) cm^2 if it scales as the temperature squared. These are the most robust limits on DM-neutrino interactions to date, demonstrating that one can use the distribution of matter in the Universe to probe dark ("invisible") interactions. Additionally, we show that scenarios involving thermal MeV DM and a constant elastic scattering cross section naturally predict (i) a cut-off in the matter power spectrum at the Lyman-alpha scale, (ii) N_eff ~ 3.5 +/- 0.4, (iii) H_0 ~ 71 +/- 3 km/s/Mpc and (iv) the possible generation of neutrino masses.Comment: 12 pages, 5 figure

Deciphering Dark Matter with Cosmological Observations

Determining the nature of dark matter (DM) remains one of the key challenges in both particle physics and cosmology. Although we know the approximate distribution of DM in the Universe, we lack an understanding of its fundamental properties such as its mass and potential couplings to Standard Model particles. In the weakly-interacting massive particle (WIMP) paradigm, DM was in thermal equilibrium in the early Universe and we should expect scattering to have occurred between DM and Standard Model particles. In this thesis, we first consider the impact of primordial scattering between DM and radiation (photons or neutrinos). Such interactions give rise to a modification in the amplitude and position of the cosmic microwave background (CMB) acoustic peaks and a series of damped oscillations in the matter power spectrum. We obtain constraints from the Planck satellite and other CMB experiments, and then derive limits from large-scale structure (LSS) surveys. By providing forecasts for future experiments, we illustrate the power of LSS surveys in probing deviations from the standard cold DM (CDM) model. Then, using high-resolution N-body simulations, we show that the suppressed matter power spectra in such interacting DM scenarios allows one to alleviate the small-scale challenges faced by CDM; in particular, the "missing satellite" and "too big to fail" problems. Finally, we show that the excess of 511 keV gamma-rays from the Galactic centre, which has been observed by numerous experiments for four decades, cannot be explained via annihilations of light WIMPs, suggesting an astrophysical or more exotic DM source of the signal

The Knowledge Gap in Workplace Retirement Investing and the Role of Professional Advisors

The dramatic shift from traditional pension plans to participant-directed 401(k) plans has increased the obligation of individual investors to take responsibility for their own retirement planning. With this shift comes increasing evidence that investors are making poor investment decisions. This Article seeks to uncover the reasons for poor investment decisions. We use a simulated retirement investing task and a new financial literacy index to evaluate the role of financial literacy in retirement investment decisionmaking in a group of nonexpert participants. Our results suggest that individual employees often lack the skills necessary to support the current model of participant-directed investing. We show that less knowledgeable participants allocate too little money to equity, engage in naive diversification, fail to identify dominated funds, and are inattentive to fees. Over the duration of a retirement account, these mistakes can cost investors hundreds of thousands of dollars. We then explore the capacity of professional advisors to mitigate this problem. Using the same study with a group of professional advisors, we document a predictable but nonetheless dramatic knowledge gap between professionals and ordinary investors. The professional advisors were far more financially literate and made better choices among investment alternatives. Our results highlight the potential value of professional advice in mitigating the effects of financial illiteracy in retirement planning. Our findings suggest that, in weighing the costs of heightened regulation against the value of reducing possible conflicts of interest, regulators need to be sensitive to the knowledge gap

The Sucker Norm

In this paper, I review the theoretical and empirical scholarship bearing on the notion of being a sucker. I suggest that there is a social norm against being a sucker, and that a number of experimental results could be reconsidered in light of this sucker norm. First, I establish, at least for the purposes of this analysis, the basic parameters of what it means to be a sucker. Second, I consider when the fear of being a sucker is helpful or normative, and when it seems to be misapplied to cases in which it might actually lead to sub-optimal outcomes. I suggest that the fear of being a sucker is especially potent because it defies a social norm. Third, I review research on situations in which people might try (and succeed) to avoid invoking the sucker norm so that they can accept a disadvantageously inequitable allocation when there is no chance for a higher payoff. I discuss how certain forms of retaliation and punishment might be explained as ways to alleviate the uncomfortable feeling of being a sucker. Finally, I offer some preliminary data on the effect of the sucker norm on behavior in an experimental game, and consider the possible implications of these results and directions for future researc

Intuitive Formalism in Contract

This Article starts with the proposition that most American contracting is consumer contracting, posits that consumer contracting has particular and even peculiar doctrinal features, and concludes that these features dominate the lay understanding of contract law. Contracts of adhesion constitute the bulk of consumer experience with contract law. It is not hard to see that someone discerning the nature of contract law from a sample composed almost entirely of boilerplate terms and conditions would come quickly to the conclusion that contract law is highly formal. Within the realm of potentially enforceable deals (i.e., those that are supported by consideration and not illegal or unconscionable), modern contract doctrine upholds agreements when the parties have objectively manifested assent. This is the contract law of the first‐year Contracts course, and it is, more or less, why contracts existed in the cases Hadley v. Baxendale, Hawkins v. McGee, and Embry v. Hargadine, McKittrick Dry Goods Co. These three canonical cases each involve oral manifestations of assent: respectively, the contracts are based on the carrier\u27s promise that the crankshaft would be delivered by noon the next day; the doctor\u27s promise of a one‐hundred percent good hand; and the employer\u27s response to his anxious employee, “You\u27re alright. Go get your men out.” For everyone who knows the doctrine of assent, these are relatively easy cases for finding contracts, because the evidence suggests that the parties, in fact, communicated to each other their agreement. However, these cases might startle a large percentage of the nonattorney population, for the simple reason that they are oral and not written contracts. What accounts for this misperception of contract law? Americans are not contract naïfs. On the contrary, most people enter into numerous legally binding agreements every year, if not every month or week. These are the agreements we make with Amazon, PayPal, Comcast, Apple, AT&T, and Visa, to name a few—in other words, these are the contracts we enter into regularly as consumers. Consumer contracts share key features: they are formal, assent is memorialized (either by signature or by clicking “I agree”), parties neither negotiate nor read their terms, and they are almost universally enforceable and, when litigated, enforced. This is the contract law that individuals encounter every day. As such, perhaps we should not be surprised that this is what most people think that contract law is. Emerging evidence indicates that most people think contracting means signing the paperwork and that contract law is about the form of consent rather than the content to which parties are consenting. This “intuitive formalism” deserves our empirical and normative attention because it has real implications for how consumers behave in their deals and how they interact with their legal system

The Perverse Consequences of Disclosing Standard Terms

Although assent is the doctrinal and theoretical hallmark of contract, its relevance for form contracts has been drastically undermined by the overwhelming evidence that no one reads standard terms. Until now, most political and academic discussions of this phenomenon have acknowledged the truth of universally unread contracts, but have assumed that even unread terms are at best potentially helpful, and at worst harmless. This Article makes the empirical case that unread terms are not a neutral part of American commerce; instead, the mere fact of fine print inhibits reasonable challenges to unfair deals. The experimental study reported here tests the hypothesis that when a policy is disclosed as a boilerplate contract term, it appears more legitimate, both morally and legally, than if it is disclosed elsewhere—even if the term would be plausibly subject to legal challenge in either case. Subjects from an in-person campus sample were randomly assigned to read about a consumer policy communicated either as a standard term in a form contract, or as a company policy available on the firm’s website. They were more likely to think that harsh policies were legally enforceable, and morally defensible, when the policies were in the fine print—and were more likely to object to a policy that was publicly available but not within the standard terms. Disclosing onerous terms up front does not affect consumer choice ex ante but creates a problematic assumption of enforceability when the terms turn out to be troublesome ex post. These results were also replicated using a sample of subjects from the general population. If correct, this phenomenon presents a substantial challenge to the traditional economic analysis of private bargaining in contract. The Article concludes with an analysis, in light of these findings, of doctrinal, political, and market mechanisms for policing unfair terms