Abstract
This study examines the cognitive processes underlying investors’ extrapolations of past fund performance and whether investors’ attention patterns may explain their return-chasing behaviors. We measured the attention that investors paid to mutual fund disclosures in a simplified fund prospectus using unobtrusive infrared eye tracking. Results suggest that prior fund performance, which is normatively irrelevant information and not useful in predicting future performance, received considerable attention from investors. More interestingly, the impact of prior fund performance on investors’ purchasing intentions was fully mediated through expected returns and attention paid to past performance information. The results indicate that investors apparently believe in performance persistence or in a ‘hot hand’ effect, and that mutual fund purchases are driven by salient information such as superior performance. Moreover, we tested the disclaimer mandated by regulatory bodies, which warns that past performance does not guarantee future results. We found that the disclaimer was ineffective in reducing investors’ extrapolation biases, despite the fact that the disclaimer was attended to and properly encoded by investors.
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Notes
The software provided by SensoMotoric Instruments (SMI) refers to gaze duration as dwell time, which is computed as the sum of all fixation durations and saccades.
References
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This study was funded by the ‘Forschungskredit’ of the University of Zurich, grant no. 56260602.
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1Andreas Hüsser (MA) is a PhD student in the Department of Media Psychology and Effects at the Institute of Mass Communication and Media Research, University of Zurich, Switzerland. His research focus on media psychology and media effects, advertising, and persuasion, especially in the field of financial communication.
2Werner Wirth (PhD) is a Full Professor of empirical methods and Head of the Department Media Psychology and Effects at the Institute of Mass Communication and Media Research, University of Zurich, Switzerland. His research focus on media psychology and media effects, persuasion, emotions, and empirical methods in the field of political communication, mobile communication, online communication and financial communication.
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Hüsser, A., Wirth, W. Do investors show an attentional bias toward past performance? An eye-tracking experiment on visual attention to mutual fund disclosures in simplified fund prospectuses. J Financ Serv Mark 19, 169–185 (2014). https://doi.org/10.1057/fsm.2014.20
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DOI: https://doi.org/10.1057/fsm.2014.20