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Why Do Investors Choose High-fee Mutual Funds Despite the Lower Returns?

With their combination of low fees, tax efficiency and simple, autopilot investing style, index funds seem to have captivated American investors. At the same time, however, many investors still hold trillions of dollars in high-fee funds despite well-publicized evidence that low-fee alternatives offer higher returns over the long run. “It struck us that most people just don’t know what mutual fund fees are. So we set out to actually test that,” says Brigitte C. Madrian, professor of business and public policy at Wharton. The result is a paper titled, “Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds,” by Madrian, Yale professor James J. Choi and Harvard economics professor David Laibson.


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