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

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

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Title: Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds
Author: Laibson, David I.; Choi, James; Madrian, Brigitte

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Citation: Choi, James, David Laibson, and Brigitte Madrian. 2010. Why does the law of one price fail? An experiment on index mutual funds. Review of Financial Studies 23(4): 1405-1432.
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Abstract: We evaluate why individuals invest in high-fee index funds. In our experiments, subjects each 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 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.
Published Version: doi:10.1093/rfs/hhp097
Terms of Use: This article is made available under the terms and conditions applicable to Open Access Policy Articles, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#OAP
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:4686775

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  • FAS Scholarly Articles [7220]
    Peer reviewed scholarly articles from the Faculty of Arts and Sciences of Harvard University
 
 

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