By Bilal Hafeez 13-12-2019
In: podcasts | Investment Strategy

Picking 401(k) Funds Can Be as Easy as ABC, and That’s Bad (WSJ Your Money Briefing)

(7 min listen)
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Summary (You can listen to the podcast by clicking here)

Wall Street contributor Daisy Maxey reveals several behavioural biases found to be associated with investors’ fund selection process:

• The biggest (and most shocking) issue: when they are to choose, investors pick the first funds in the list, placing basically the alphabet at the centre of the decision-making process.

• Reordering funds from bottom to top showed a remarkable difference of around a $578,000 increase in a bottom-listed funds’ intakes.

• When presented with multiple alternatives with different attributes, individuals stop searching after finding the first acceptable option.

• Such behaviour appears also at a larger scale: companies with early alphabet names tend to have larger traded volumes, politicians in the same category tend to get elected more frequently, and researchers in the same category tend to be invited to present more.

 

Why does this matter? There are currently attempts to design and test mechanisms that eliminate this ordinal bias, one of them being ordering by expense ratio. So, if you happen to see differences in how your 401(k) options are listed, that’s probably why.