Investors ignore performance disclaimers, back their own experience in selecting funds

CQUniversity gambling researcher Dr Philip Newall has traded in casinos for stock markets, with his latest research looking at investment performance disclaimers.

The researcher with CQUniversity's Experimental Gambling Research Laboratory is a co-author on the study Persistence is futile: Chasing of past performance in repeated investment choices, published in the Journal of Experimental Psychology.

The research surveyed 1600 people in the United States, inviting them to make a monthly choice between two hypothetical funds, while considering the previous month's losses or gains and fund fees.

They included randomised mutual-fund disclaimers that "past performance does not guarantee future results"' and highlighting the advantages of fee minimization.

Dr Newall said that on average, Fund A outperformed Fund B, because its fees were much lower – but introducing the disclaimer changed the decision.

"When the 'investors' viewed the disclaimer, they were actually more likely to choose the fund with higher fees," Dr Newall said.

"Especially experienced investors seem to think they can game the system, that the warning doesn't apply to them, and that by choosing the more expensive fees they're making it work, because they think 'I know better'."

And the phrase "does not guarantee future results" may actually be causing investors to conclude erroneously that past performance is nonetheless a reliable indicator.

"Ironically, it's actually low fees that are a better indicator of future outcomes than past returns," Dr Newall said.

He said another factor influencing investment decisions was social comparison.

"Everyone wants to know the returns others are making, and then make decisions to 'get ahead of the Joneses'," he explained.

Dr Newall also shared his research in a Wall Street Journal article, and said the project showed individuals who lack both financial literacy and prior investment experience are the most susceptible to making poor mutual fund choices.

"It's this group that can most benefit from behavioural interventions, such as the new disclaimer we tested here," he said.

"These results can inform real-world investment decisions, and how industry designs more efficient disclaimers that can be used beyond investment choices."