Risk Perceptions of Mutual Funds-Evidence from an Experimental Approach

Abstract

Analysis of mutual fund advertisements in previous research has shown that most (88%) do not contain all the requisite information on the risk-return trade-off, principal-agent conflict, and transaction costs that consumers need to optimize their investment decisions. This research reports the findings of an experiment carried out to understand the Huhmann-Bhattacharyya (2005) paradox. Results indicate that including information on risk-return trade-off, principal-agent conflict, and transaction costs in mutual fund advertisements increase consumer risk perceptions of the mutual fund. This result has important policy implication for levelling the playing field in mutual fund advertising. For example an interesting and important public policy question would be whether or not financial literacy training alters advertising information usage and attitudes. Results could help determine public policy on imparting financial literacy training to the general population.