Do Investors Show an Attentional Bias toward Past Performance? An Eye-Tracking Experiment on Visual Attention to Mutual Fund Disclosures in Simplified Fund Prospectuses

Abstract

The task of financial decision making poses substantive challenges and difficulties for investors, which is not surprising given the complexity of financial products and the neverending innovations in the financial services and information technology sectors. The thousands of options available to investors and the enhanced regulatory disclosure requirements demand a great deal of motivation and ability on the part of investors, and are often a source of information overload (Diacon and Hasseldine, 2007; Kozup and Hogarth, 2008; Kozup et al, 2008; Estelami, 2009). For example, in a survey by the Investment Company Institute (2006), many fund investors indicated that fund prospectuses are difficult to understand, and they stated their preference for graphics and charts over narrative descriptions of investments. It is therefore not surprising that investors overwhelmingly rely on past performance data and advertisements as important sources of information for decision making (Capon et al, 1996; Wilcox, 2003). Given that statutory prospectuses are complex and that graphical displays to enhance readability are generally absent, the Securities and Exchange Commission (SEC) adopted amendments to simplify disclosures. Investors are to be provided with key information, such as investment objectives, investment risks and costs, as well as past performance data, in a summary prospectus (SEC, 2009; Beshears et al, 2009). Given that financial services marketers selectively advertise their high-performing funds, which can create unrealistic return expectations, the SEC has also amended rules on past performance presentations. Moreover, the amended rules require a disclaimer warning that past performance is a poor indicator of future results (Feuerborn, 2001; Federal Register, 2003; Koehler and Mercer, 2009).