Diversification Bias and the Law of One Price: An Experiment on Index Mutual Funds

Journal of Behavioral Finance, Forthcoming

22 Pages Posted: 15 Jan 2015 Last revised: 4 Jan 2016

Nathan Mauck

University of Missouri - Kansas City

Leigh Salzsieder

University of Missouri at Kansas City

Date Written: January 14, 2015

Abstract

Individual investors select high-fee index mutual funds despite the fact that the future payouts are nearly identical. We offer an explanation for this violation of the Law of One Price based on investor desire to diversify. While diversification in some settings may be beneficial, in the case of assets with identical payouts, fee minimization is the only rational strategy. Our evidence confirms that investors diversify by selecting multiple higher fee funds rather than minimizing fees when investing in index mutual funds.

Keywords: Mutual funds, S&P index funds, behavioral finance, diversification bias

JEL Classification: C91, D03, D14, G11, G23

Suggested Citation

Mauck, Nathan and Salzsieder, Leigh, Diversification Bias and the Law of One Price: An Experiment on Index Mutual Funds (January 14, 2015). Journal of Behavioral Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2549410 or http://dx.doi.org/10.2139/ssrn.2549410

Nathan Mauck (Contact Author)

University of Missouri - Kansas City ( email )

5100 Rockhill Road
Kansas City, MO 64110-2499
United States

Leigh Salzsieder

University of Missouri at Kansas City ( email )

5100 Rockhill Road
Kansas City, MO 64110-2499
United States

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