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Worthless Warnings? Testing the Effectiveness of Disclaimers in Mutual Fund Advertisements

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  • Molly Mercer
  • Alan R. Palmiter
  • Ahmed E. Taha

Abstract

More than $11 trillion is invested in mutual funds in the United States. Mutual fund investors flock to funds with high past returns, despite there being little, if any, relationship between high past returns and high future returns. Because fund management fees are based on the amount of assets invested in their funds, however, fund companies regularly advertise the returns of their high‐performing funds. The SEC requires these advertisements to contain a disclaimer warning that past returns do not guarantee future returns and that investors could lose money in the funds. This article presents the results of an experiment that finds that this SEC‐mandated disclaimer is completely ineffective. The disclaimer neither reduces investors' propensity to invest in advertised funds nor diminishes their expectations regarding the funds' future returns. The experiment also suggests, however, that a stronger disclaimer—one that informs investors that high fund returns generally do not persist—would be much more effective.

Suggested Citation

  • Molly Mercer & Alan R. Palmiter & Ahmed E. Taha, 2010. "Worthless Warnings? Testing the Effectiveness of Disclaimers in Mutual Fund Advertisements," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 7(3), pages 429-459, September.
    • Handle: RePEc:wly:empleg:v:7:y:2010:i:3:p:429-459
    DOI: 10.1111/j.1740-1461.2010.01184.x
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    Cited by:

    1. M. Brenncke, 2024. "A Theory of Exploitation for Consumer Law: Online Choice Architectures, Dark Patterns, and Autonomy Violations," Journal of Consumer Policy, Springer, vol. 47(1), pages 127-164, March.
    2. Medha Kulkarni & Leena B. Dam & Feeroj Nasirkhan Pathan & Vaibhav V. Vasundekar, 2024. "Evaluating Efficacy of Statutory Disclaimers of Mutual Funds on Novice and Seasoned Investors," Business Perspectives and Research, , vol. 12(1), pages 113-132, January.
    3. Newall, Philip Warren Stirling & Parker, Katie, 2017. "Improved mutual fund investment choice architecture," OSF Preprints qknjt, Center for Open Science.
    4. Christoph Huber & Jürgen Huber, 2019. "Scale matters: risk perception, return expectations, and investment propensity under different scalings," Experimental Economics, Springer;Economic Science Association, vol. 22(1), pages 76-100, March.
    5. Lisa Koonce & Zheng Leitter & Brian White, 2023. "The effect of a warning on investors’ reactions to disclosure readability," Review of Accounting Studies, Springer, vol. 28(2), pages 769-791, June.

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