Selection Neglect in Mutual Fund Advertisements
Jonathan J. Koehler
Northwestern University - Pritzker School of Law
Arizona State University (ASU) - W.P. Carey School of Business
July 1, 2009
Management Science, Vol. 55, p. 1107, 2009
Northwestern Law & Econ Research Paper No. 11-02
Northwestern Public Law Research Paper No. 11-14
Mutual fund companies selectively advertise their better performing funds. However, investors respond to advertised performance data as if those data were unselected (i.e., representative of the population). We identify the failure to discount selected or potentially selected data as selection neglect. We examine these phenomena in an archival study (Study 1) and two controlled experiments (Studies 2 and 3). Study 1 identifies selection bias in mutual fund advertising by showing that the median performance rank for advertised funds is between the 79th and 100th percentile. Study 2 finds that both novice investors and financial professionals fall victim to selection neglect in a financial advertising task unless the advertisement makes the selective nature of available performance data transparent. Study 3 shows that selection neglect associated with a large well-known company can be debiased with a simple extrinsic sample space cue, although individual differences in statistical reasoning also matter. We argue that selection neglect results from a general tendency to ignore underlying sample spaces rather than a fundamental misunderstanding about the data selection process or the value of selected data.
Number of Pages in PDF File: 16
Keywords: selection bias, financial decision making, mutual fund ads, statistical heuristics, sample space
JEL Classification: K10, K19, K20, K22
Date posted: February 4, 2011
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