EXPRESS: Fooled by Success: How, Why, and When Disclosures Fail or Work in Mutual Fund Ads

Mutual fund advertisers often highlight their funds’ past returns albeit with an SEC mandated disclosure. To ascertain whether the SEC disclosure is effective and how it could be improved, the authors conduct seven experiments of individuals’ choices of mutual funds with ads touting past success plus disclosures. These experiments lead to several findings: First, current SEC disclosures do not work because investors fall prey to the hot hand bias and believe that past performance trends will continue. Second, while investors comprehend the content of the SEC disclosure, they misapply it. Third, an alternate stronger, less ambiguous disclosure effectively attenuates investors’ preferences for funds with longer (vs. shorter) performance runs. Fourth, the authors also show that only a disclosure that directly relates to the beliefs that give rise to the hot hand bias overcomes peoples’ tendency to chase returns. Fifth, these findings generalize to the real estate context. This is the only research that shows that when the SEC disclosure found in mutual fund ads is pitted against the hot hand bias, the hot hand wins out. Yet, a strongly worded disclosure has some success at debiasing individuals. Implications for policy makers, practitioners, and consumers are discussed.