Heuristics in Mutual Fund Consumers' Willingness‐to‐Invest: An Experimental Approach

• Published date: 01 December 2019
• Author: Jaime F. Lavin,Mauricio A. Valle,Nicolás S. Magner
• Date: 01 December 2019
• DOI: http://doi.org/10.1111/joca.12279

1970 THE JOURNAL OF CONSUMER AFFAIRS

JAIME F. LAVIN , MAURICIO A. VALLE, AND

NICOLÁS S. MAGNER

Heuristics in Mutual Fund Consumers’

Willingness-to-Invest: An Experimental Approach

This paper improves the understanding of heuristics in the choice of

mutual funds. We analyze the effect of price-quality relationship and

anchors as heuristics on the evaluation of the willingness-to-invest.

We perform two studies with graduate students who possess a

medium–high level of nancial literacy in Chile. In the rst study,

we nd that willingness-to-invest increases (decreases) when subjects

observe (do not observe) in the market a positive relationship between

expense ratios (price) and service quality. In the second study, in the

presence of an anchor, the reference price obtained by individuals

from the market information loses relevance and the anchor effect

predominates. Our results conrm that participants, as consumers of

nancial services, apply heuristics as groundwork for their investment

decisions. These heuristics as a decision making process are useful but

do not always lead to the choice of the lowest cost alternative with the

highest possible service quality.

The use of mutual funds as an investment vehicle in households in devel-

oped and developing countries has increased thanks to their efciency in

terms of liquidity and diversication. According to gures from the Invest-

ment Company Institute,1in mid-2017, 45.4% of American households

had mutual fund investments, reaching 57.3 million households and 101.9

million retail investors who have a median of four funds per household

and US$ 125,000 invested. One of the basic characteristics of this group of

retail investors is that most havea middle income and are at the peak of their

income generation and saving years (Holden, Schrass, and Bogdan 2017).

In Chile, where the mutual funds industry has a smaller penetration than

1. ICI Fact Book 2017 (www.icifactbook.org).

Jaime F. Lavin (jaime.lavin@uai.cl) is a Researcher and Associate Professor,School of Business

at the Adolfo Ibáñez University, Chile; Mauricio A. Valle (mvalle@uft.cl) is an Assistant Professor,

Faculty of Economic and Business at the Universidad Finis Terrae, Chile; and Nicolás S. Magner

(nmagner@uft.cl) is an Assistant Professor, Faculty of Economic and Business at the Finis Terrae

University,Chile. The authors wish to thank the editor and three anonymous referees for their comments

and suggestions.

The Journal of Consumer Affairs, Winter 2019: 1970–2002

DOI: 10.1111/joca.12279

Copyright 2019 by The American Council on Consumer Interests

WINTER 2019 VOLUME 53, NUMBER 4 1971

in the United States, the growth rate in the number of investors in the last

5 years has been higher. In the 2012–2017 period, accumulated investor

growth in the United States reached 8.2%; in Chile, investor growth was

54.2% and mainly concentrated in the retail segment.2

Despite the widespread use of mutual funds, choosing one is no easy

task. It involves a consumer with a low level of nancial literacy, who

faces a signicant spread in the prices of the funds to choose from,3but

not so in their returns.4Furthermore, the consumer must also analyze and

comprehend contextual information of a technical nature that is difcult

to process (Beckett, Hewer, and Howcroft 2000; Chase and Tansik 1983;

Van Rooij, Lusardi, and Alessie 2012). This contextual information refers

to information about prices and service quality available to the consumer

as part of the range of offers in the market (Adaval and Monroe 2002).

In a mutual fund context, investors choose funds by contrasting expense

ratios (i.e., prices or fees) and the expected quality of the service. The

latter, understood as intangible attributesrelated to attention, cordiality,and

information delivery (i.e., the cordiality of the attention, prompt delivery

of the information, and ease of communication with the nancial advisor)

(Gronroos 2001; Kang and James 2004; Parasuraman, Zeithaml, and Berry

1985).

In Chile, when a retail investor wishes to invest in mutual funds

goes directly to a fund administrator company5—usually belonging to

a commercial bank—and chooses one according to her preferences and

nancial needs. Most individuals invest in the fund administrator company

where they have a bank checking account. Although investorsin the United

States may access a mutual fund via a broker, who is paid a fee, the

concept of a broker is nonexistent in Chile. Instead, a fund administrator

company in Chile assists their clients in selecting a fund through their

2. Prepared by the authors from reports by the Association of Mutual Funds of Chile (www.aafm

.cl) and Investment Company Institute (www.ICI.org).

3. Ferreira et al. (2013) show that expense ratios vary considerably around the world. On average

for the 2000–2007 period, the overall expense ratio was 1.46% with a standard deviation of 0.61%

among 27 economies. While the US records an average expense ratio of 1.31%, Chile has an average

of 5% in equity mutual funds for this period (Lavin and Magner 2014).

4. The relationship between fees and performance is a hot topic in mutual funds literature. The

evidence shows that the funds are not able to obtain returns higher than the stock indexes, and that

these do not persist over time, i.e., a fund that performed well in the past does not have a greater

probability of performing well in the future. Additionally, there is no evidence of predictability in the

returns (Berk and Green 2004; Carhart 1997).

5. Each fund is managed by only one fund administrator company, named AGF (Administradora

General de Fondos, in Spanish), while in the market participate many fund administrators companies

that administer more than one mutual fund.

1972 THE JOURNAL OF CONSUMER AFFAIRS

investment advisory teams. In this way, each one offers different services

to its clients and charges them through the expense ratio of the funds. These

services include personalizing attention, timely response to inquiries,

apps and electronic web operation platforms, and ease of accessibility to

information, among others.

Faced with nancial decisions, investors tend to exhibit behavioral

biases (Elton and Gruber 2013) that lead them to support their choices in

heuristics. This behavior is relevant because when consumers of nancial

products face complex decisions and/or are under pressure, they tend to

use heuristics instead of a cognitive process (Lee and Marlowe 2003). In

this sense, heuristics become a convenient procedure that helps nancial

consumers to simplify the task of selecting alternatives; however, as

evidence shows, they can lead to poor decisions.

Through two studies, this paper analyzes in Chile the

willingness-to-invest (hereafter, WTI) and the expected quality (hereafter,

EXQ) of a mutual fund consumer under different scenarios that relate

the price of the fund with the coherence of the contextual information6

in the presence and absence of anchors. From a nancial perspective, an

investor would choose funds evaluating their risk-return trade-off. Funds

of the same nature and risk will have similar returns before expenses;

accordingly, from a group of funds with identical risk characteristics,

the optimal choice consistent with traditional nance theory would be to

choose the fund with the lowest expense ratio. Instead, people rely upon

heuristics that cause them to pay excessive expense ratios. On the other

hand, from the consumer behavior perspective, consumers express their

preferences on the basis of a value maximization process, selecting the

alternative that offers the lowest cost with the highest expected service

quality (Zeithaml 1988). One conjecture associated with nancial services

is that mutual fund consumers evaluate their decisions by selecting funds

on the quality-price trade-off that maximizes their utility.7

As mentioned above, given that consumers use heuristics, these can gen-

erate suboptimal selections that negatively affect the investor’s wealth in

the long term. Specically, this work focuseson improving the understand-

ing of two heuristics that individuals use in the assessment of a service.

The rst is a price-quality heuristic in which a higher price implies better

6. By coherence (incoherence) of contextual information, we refer to the perceived relationship

between price and service quality cues of different funds to invest, that exhibit a direct (indirect)

relation between expense ratios and service quality (see Theoretical and Hypothesis section for a deeper

explanation).

7. That is, those that offer the highest service quality at the lowestexpense ratio. In our experimental

design, expense ratios, and service quality are the only difference between the offered funds.