Cognitive Disabilities in Investment or why Wharton MBAs couldn't choose a low-cost index fund.

Very few people have the skill and the necessary time available to make intelligent choices about their retirement savings (i.e. 401(k)plan, IRAs, ROTH IRAs etc).

Unfortunately, the participants in the study inspire anything but confidence as individuals continue to take control of their retirement assets. Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds, a paper authored by professors from Yale, Harvard and the Wharton School, asks Wharton MBA and Harvard College students to allocate an imaginary pot of $10,000 across four S&P 500 index funds with varying expense ratios and commissions of more than a little significance. In the first experiment, the only related literature the students are given to make an informed decision is the prospectus for each fund. The result? To quote the study authors, "Over 95% of control group subjects fail to minimize fees." In other words, only 5% made the correct decision of choosing the lowest-cost index fund.


I'm not particularly worried that Wharton MBAs couldn't read a prospectus well-enough to determine which index funds had the lowest costs. I've always maintained that MBA school teaches you just about nothing (with the exception of Chicago & MIT), but is just a rite of passage that one has to complete.

I'm, however, concerned that many intelligent people don't understand retirement planning and are going to be woefully under-prepared when it comes time to retire.

The simplest savings advice would be:

1) Eliminate debt (especially credit-card debt)
2) Invest in a low cost index fund.
3) Don't worry about short-term market gyrations.

But just as everyone claims to be a better driver, everyone claims to have "superior" investing skills or the ability to "time" the market.


The age of self-managed retirement funds can be imagined as a wonderful world, one in which enlightened citizens invest their assets wisely over time so as to live out their golden years in comfort and style. Or so one could theorize. In practice, it may turn out to be something less. How much less depends on any number of factors, starting with the particular skills of the individual.


Part of me wants to say "tough" and part of me realizes that this will be a huge problem in the future.