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Alphabeticity Bias in 401(k) Investing

edited January 14 in Fund Discussions
A white paper, “Alphabeticity Bias in 401(k) Investing,” finds that investors tend to select funds at the top of an alphabetically organized list of funds. Authored by academics at Saint Louis University, Seton Hall University and Kansas State University, as well as a researcher at the Ipsos Behavioral Science Center, the paper finds that people tend to select the first “acceptable” option.

“Thus, when a participant searches through her plan’s menu of investment options, she may be more likely to choose the funds appearing towards the beginning of the list,” the paper says. “Since 401(k) fund choices with early alphabet names appear at the beginning of the list, they will be chosen more often than later alphabet named funds. We find that the same fund appearing in multiple plans in the sample receives a significantly higher allocation when it is listed closer to the top of the plan menu.”

Paper Link at SSRN [free registration required]
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3295400

Comments

  • Hope these folks are not buying their autos/trucks/vehicles using this method, eh?
    How are they choosing a real estate broker? :)
    A dart board method might be better suited.
  • Not to get too political, but this is a well known effect on election ballots. People tend to vote more for the candidates/parties listed first.

    Of course, this phenomenon also goes toward explaining why Vanguard is soaring in popularity:-)
  • I wonder how many low-lettered funds in such plans are expensive-as-hell, too.
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