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. 2010 Apr 1;23(4):1405-1432.
doi: 10.1093/rfs/hhp097.

Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds

James J Choi  1 , David Laibson, Brigitte C Madrian
Affiliations

Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds

James J Choi et al. Rev Financ Stud. .

Abstract

We conduct an experiment to evaluate why individuals invest in high-fee index funds. In our experiments, subjects allocate $10,000 across four S&P 500 index funds and are rewarded for their portfolio's subsequent return. Subjects overwhelmingly fail to minimize fees. We can reject the hypothesis that subjects buy high-fee index funds because of bundled non-portfolio services. Search costs for fees matter, but even when we eliminate these costs, fees are not minimized. Instead, subjects place high weight on annualized returns since inception. Fees paid decrease with financial literacy. Interestingly, subjects who choose high-fee funds sense they are making a mistake.

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Figures

Figure 1
Figure 1
Average Fund Allocations by Subject Group and Experimental Condition
Figure 2
Figure 2
Histogram of Fees Paid by Subject Group and Experimental Condition
See this image and copyright information in PMC

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