Abstract

http://ssrn.com/abstract=1755160
 
 

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Selection Neglect in Mutual Fund Advertisements


Jonathan J. Koehler


Northwestern University - School of Law

Molly Mercer


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

Abstract:     
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

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Date posted: February 4, 2011  

Suggested Citation

Koehler, Jonathan J. and Mercer, Molly, Selection Neglect in Mutual Fund Advertisements (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. Available at SSRN: http://ssrn.com/abstract=1755160

Contact Information

Jonathan J. Koehler (Contact Author)
Northwestern University - School of Law ( email )
375 E. Chicago Ave
Unit 1505
Chicago, IL 60611
United States
Molly Mercer
Arizona State University (ASU) - W.P. Carey School of Business ( email )
Tempe, AZ 85287-3706
United States
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