Why consumers choose managed mutual funds over index funds: Hypotheses from consumer behavior

Much evidence exists which suggests that the vast majority of equity mutual fund managers do not possess differential information (or skills) which al low them to achieve above average market returns for their investors, Thus, when investors pay fees to equity mutual fund managers for investment advi ce and management, the very probable outcome is that they are reducing the return that they would otherwise achieve by investing in a nonmanaged index fund that tracks the total stock market (e.g., Wilshire 5000) or some sign ificant portion of it (e.g., the Standard & Poor's 500), The long-term nega tive consumer welfare implications are large, very possibly in the hundreds of thousands of dollars for individual consumer investors. Drawing largely on insights from the psychology, consumer behavior, and behavioral finance literatures, we offer a series of hypotheses that may partially account fo r such consumer choices. We conclude with a call for increased government- and employer-sponsored education programs aimed at creating a more informed consumer investor.