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The role of investors’ objective financial knowledge on the assessment of risk disclosures in mutual fund advertisements

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Abstract

This study examined the role of investors’ objective financial knowledge in processing risk disclosures in mutual-fund advertisements. Investors were exposed to a mutual fund advertisement containing either a disclaimer mandated by regulatory bodies or a strongly worded warning label. Overall, the results showed that mandated disclaimers were ineffective in reducing investors’ return expectations and attitudes toward the advertised fund, regardless of the investors’ level of financial knowledge. However, strongly worded warning labels effectively impacted the return expectations and attitudes of low-knowledge investors, but not high-knowledge investors. That is, the impact of warning labels was dependent on the level of an investors’ financial knowledge; specifically, high-knowledge investors failed to discount past performance as a heuristic cue in their judgments. Importantly, this behavior of high-knowledge investors was not due to a familiarity effect; the risk disclosures were properly encoded and processed by knowledgeable investors. These results suggest that high-knowledge investors either possessed strongly held beliefs (for example, the ‘hot hand’ effect) that persevered even when exposed to the strongly worded warning, or they were overconfident in their judgments.

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Acknowledgements

This study was funded by the ‘Forschungskredit’ of the University of Zurich, grant no. 56260602.

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Authors and Affiliations

  1. Department of Media Psychology and Effects, Institute of Mass Communication and Media Research, University of Zurich, Andreasstrasse 15, Zurich, 8050, Switzerland

    Andreas Hüsser

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  1. Andreas Hüsser
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Correspondence to Andreas Hüsser.

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1(MA, University of Zurich) 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.

Appendices

Appendix A

Stimulus material

Disclaimer condition

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figure d

Warning condition

illustration

figure c

Excerpt stimulus material

illustration

figure b

Appendix B

Financial knowledge test

Please answer the following questions by checking the box for the most appropriate answer. There is only one correct answer for each question. (The correct answers are indicated in italics)

  1. 1

    What is the main difference between equity markets and bond markets?

    • The valuation of equity markets is based more on fundamentals (27.7 per cent)

    • The orientation of equity markets is longer termed (21.4 per cent)

    • Equity markets are more liquid (44.2 per cent)

    • I do not know (6.7 per cent)

  2. 2

    When interest rates of bonds decline, what happens to the price of an existing bond?

    • The price increases (56.4 per cent)

    • The price decreases (28.9 per cent)

    • The price stays the same (9.2 per cent)

    • I do not know (5.5 per cent)

  3. 3

    What was the yearly total average return of the US stock markets from 1921 to 2001?

    • 4 per cent (26.6 per cent)

    • 11 per cent (49.5 per cent)

    • 20 per cent (7.5 per cent)

    • I do not know (16.4 per cent)

  4. 4

    Which of the following investments is typically found in a money market fund?

    • Equities (6.1 per cent)

    • Long-termed bonds (17.6 per cent)

    • Short-termed bonds (69.2 per cent)

    • I do not know (7.1 per cent)

  5. 5

    The earnings per share of a company’s stock are 6.5. The cost of equity capital equals 10 per cent. What is the value of the company’s stock?

    • 65 (40.0 per cent)

    • 6.5 (5.7 per cent)

    • 71.5 (10.7 per cent)

    • I do not know (14.3 per cent)

  6. 6

    What is the difference between Futures and Forwards?

    • The fulfillment of Futures happens through physical delivery (8.8 per cent)

    • Futures are standardized and trading take places in a stock exchange (47.0 per cent)

    • Futures are individual transactions (6.5 per cent)

    • I do not know (37.7 per cent)

  7. 7

    What offered the best protection against inflation over long time periods?

    • Equities (66.5 per cent)

    • Gold (31.2 per cent)

    • Saving accounts (1.3 per cent)

    • I do not know (1.0 per cent)

  8. 8

    Which of the following prices increase the most when open market interest rates decline?

    • Prices of long-term bonds with low interest coupons (16.8 per cent)

    • Prices of long-term bonds with high interest coupons (59.1 per cent)

    • Prices of short-term bonds with low interest coupons (9.9 per cent)

    • I do not know (14.3 per cent)

  9. 9

    What happens to the price of a Put Option when volatility increases and the underlying price remains unchanged?

    • The price increases (43.8 per cent)

    • The price declines (16.4 per cent)

    • The price remains unchanged (10.7 per cent)

    • I do not know (29.1 per cent)

  10. 10

    What is not a characteristic of (actively managed) mutual funds?

    • Professional management (6.9 per cent)

    • Diversification (17.0 per cent)

    • Guaranteed return (74.6 per cent)

    • I do not know (1.5 per cent)

Appendix C

Measurement of the key dependent variables

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figure a

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Hüsser, A. The role of investors’ objective financial knowledge on the assessment of risk disclosures in mutual fund advertisements. J Financ Serv Mark 20, 5–22 (2015). https://doi.org/10.1057/fsm.2015.2

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