Do Investors Rationally Evaluate Investment Fees? A Behavioral Finance Investigation

Abstract

This study proposes a new behavioral finance bias, related to the evaluation of investment fees by investors following a significant period of declining investment returns. Financial theory suggests that investors would seek to minimize their total cost of investment fees but we show that where investors experience falling returns, some will chose the funds with higher fees, even though that choice leads to lower overall returns. A possible explanation may be the expectation that investors felt these higher fees were 40 The BRC Academy Journal of Business Vol. 4, No. 1 indicative of better management and a better future return. The implications of these biases will be discussed as they relate to how investors evaluate investment fees, and how this understanding affects their portfolio selection. DOI: http://dx.doi.org/10.15239/ jacadb.2014.111