There is a growing body of research providing evidence that individual investors take sub-optimal investment decisions. Previous research found that there are two advocated remedies to minimize suboptimal investments: improving financial literacy and improving information disclosure. This study focuses on the latter and empirically researches the improvement of the Key Investor Information Document.
To help investors and make financial products transparent, regulators have obligated, providers of financial goods to systematically provide investors with a prospectus before they decide to invest. This is however a long, often technical document which is not convenient for the average individual investor. Within the European Union, policymakers attempt to help investors by forcing providers to give a summary of the prospectus. This simplified prospectus called the ‘Key Investor Information Document’ (KIID hereafter) is meant to contain the most important information about the investment product at hand. The objectives of this KIID are to provide retail investors with: better disclosure, easier to understand information and to facilitate comparison of investment products (AFM, 2018). Several studies (e.g. Beshears, Choi, Laibson & Madrian, 2011; Choi, Laibson & Madrian, 2010) found evidence that this KIID does not improve the investment decision to a great extent. This current study
gives empirically based insight that the KIID in its current form is far from optimal. De Goeij, Hogendoorn and Van Campenhout (2014) provided evidence that adding graphical representation significantly de-bias the investment decision and results in cheaper investment decisions. They tested the addition of a single graphical representation of the net expected return and a representation of the risk. In this research I test several replacements of information on past performance, by a graphical
representation of the net expected return with and without risk bounds. The net expected return graph without risk bounds is similar to the graph De Goeij et al. (2014) tested, only the design and textual information is different. Testing this enhances the empirical evidence that the addition of graphical representation improves the investment decision. Additionally, a graphical representation of the net expected return that also takes risk into account, is tested. This is done to see if this representation might be better equipped to improve the key disclosed information, leading to a more optimal investment decision and a better understanding of the risk.
Empirical results are gained via an experimental survey that focuses on the investment decision concerning index mutual funds. These test results give insights that by changing the disclosed information, the investment decision can greatly be improved. Replacing information on past performance by a graphical representation of the net expected return, reduces incurred unnecessary fees by at least 33 percent. This is undoubtedly a considerable improvement in the investment decision and needs to be taken into account by policymakers.

Netspar, Network for Studies on Pensions, Aging and Retirement, is een denktank en kennisnetwerk. Netspar is gericht op een goed geïnformeerd pensioendebat.


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