Title

An Experimental Examination of Fast and Frugal Mutual Fund Picking

Department

Economics, Finance, & Quantitative Analysis

Document Type

Article

Publication Date

1-23-2012

Abstract

This paper reports the results of an experiment designed to provide insight into how people use financial information. Investors are faced with an ominous task when trying to aggregate information about available investment opportunities. In the experiment, participants received a set of information cues about mutual funds. For pairs of funds they were asked to choose the fund that would have the highest return in the following year. Importantly, participants had the opportunity to learn about the usefulness of the information cues provided. The results suggest that participants relied heavily on the cue with highest predictive accuracy. This behaviour is consistent with the use of a take the best heuristic, a decision tool that simplifies decision-making by using a single, predictive cue.