FiRe Seminar

We exploit a real-world setting at a German brokerage where a sub-sample of investors is forced to choose between two pricing schemes for trading and holding mutual funds: a flat-rate versus commission-based (pay-per-use, via front-end loads and annual fees) pricing. The investors are informed about their past trading costs and potential cost savings for the different schemes. We find that investors have a pay-per-use bias for trading mutual funds, resulting in a substantial share of investors failing to minimize their trading costs when given the chance. Investors’ pay-per-use biases are related to underestimation of trading costs and expectation-based loss aversion.