Fee structure and mutual fund choice : an experiment

We present a laboratory experiment designed to investigate the effect of the fee structure on mutual fund choice. We find that subjects tend to ignore periodic and small operating expenses fees and base their decisions on gross, instead of net, returns. A fee in the form of a, much larger, front-end load leads to lock-in into one of the funds. It is used by some subjects as a commitment device, but exacerbates the decision errors of other subjects. Although past returns do not convey information about future returns, return chasing helps explain subjects’ behavior.Ministry of Education (MOE)Nanyang Technological UniversityWe are grateful to the financial support from the FP7-EU-collaborative project Monetary and Fiscal Policy with heterogeneous agents(POLHIA) Grant no. 225048 and the Research Priority Area Behavioral Economics of the University of Amsterdam. Mikhail Anufriev and Jan Tuinstra acknowledge financial support from the Australian Research Council through Discovery Project DP140103501. Te Bao acknowledges the financial support from the Startup Grant of NTU (M4018740), Tier 1 Grant from MOE of Singapore (RG68/16) and National Natural Science Foundation of China (71803201, 71721001, 71773013 and 71873149). Angela Sutan acknowledges financial support for experiments from the PARI grant scheme from Bourgogne Franche Comté Region. Jan Tuinstra acknowledges financial support from Project BEAM (Behavioral and Experimental Analyses in Macro-finance) (NWO 464-15-143) which is partly financed by the Netherlands Organization for Scientific Research (NWO)