Misperceived Returns to Active Investing

We conduct field experiments to study how misperceptions about the returns to active investing affect portfolio choices. In our main experiment, we first elicit beliefs about the returns to active investing. We then generate exogenous variation in beliefs by providing treated respondents with information about index funds historically outperforming active funds. Treated respondents are 17.7 percentage points more likely than control group respondents to believe that index funds will outperform active funds in the future. Four months after the experiment, treated respondents have a 4.5 percentage points (38.7%) higher index fund portfolio share than control group respondents, as measured with administrative data on portfolio choices. The treatment effect persists two years after the main experiment with treated respondents having a 5.1 percentage points (32.2%) higher index fund portfolio share than control group respondents. The results demonstrate that correcting misperceptions can have a significant and persistent impact on actual portfolio choices.