Fee Structure, Return Chasing and Mutual Fund Choice: An Experiment

Abstract

We present an experiment that investigates the effect of the fee structure and past returns on mutual fund choice. We find that subjects pay too little attention to the (periodic and small) operation expenses fee, but the more salient front-end load is used as a commitment device and leads to lock-in into one of the funds. In addition, even when subjects know that future returns are independent of past returns, these past returns are an important determinant of subjects' investment choices.

Keywords: Reinforcement learning, front end load fee, operation expense, mutual fund selection

JEL Classification: C91, G02, G11