Among the MBAs, nearly 20% of the subjects who were given fee summary sheets put all their money into the lowest-cost fund, the highest percentage achieved by any of the three subject groups in any of the experiment permutations. Far less than 10% of the MBA subjects in each of the other two permutations put all of their money into the cheapest fund.

Overall though, when the fee structures were made more transparent, fewer assets were allocated to the funds with the highest costs, and the average amount of fees dropped. The fees fell a whole 5% for the Harvard staff members, and 1% for the MBA students. The decline for the college students was statistically insignificant.

Historical returns were a factor that was also shown to have an effect on how subjects made their decisions once they were singled out. When given a sheet summarizing the historical returns in the prospectuses, both student groups allocated more money to the funds with the best returns since inception - although these dates were not directly comparable.

No Trendsetters 

The Harvard staff group did not follow this trend, but the evidence indicates that they were already considering returns and searching for them in the prospectuses rather than that they ignored them. When Harvard staff members were provided with the list of FAQs explaining what an S&P 500 index mutual fund was, the portfolio fees declined, but not in a way that would be considered very statistically significant.

Despite failing to put all their money into the cheapest fund, there is a glimmer of hope with regard to investor understanding. Those who paid the highest fees were also the least confident about their choices, so they had at least an inkling that they might be on the wrong track. The authors suggest that the failure to invest entirely in the lowest-cost fund - instead investing a little in more than one of the offered funds - might indicate that the subjects do not fully understand the concept of portfolio diversification.

This is a highly readable and sometimes funny research article. (See the footnotes on page 7, in particular, where a Morgan Stanley representative actively discourages a caller from buying the firm's S&P 500 fund.) Most importantly, it offers a look into how investors think and the importance (or lack thereof) that they place on fees - and where education efforts should be focused in the future.

BONUS: Yale professor Robert Shiller is one of the developers of the S&P/Case-Shiller Home Price indexes. A paper he presented last year, "Derivatives Markets for Home Prices," is available on the SSRN site here. In it, he discusses the history of the development of real estate derivatives markets and the obstacles to their acceptance and growth.

Heather Bell is assistant editor of IndexUniverse.com. She can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

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