Advertising Effect on Investment Decisions

intermediate1 min readbusiness · economics · psychology

Thaler and Sunstein describe fund advertising that emphasized past returns and celebrity endorsements while giving little attention to fees. Their example shows why an advertisement’s persuasive appeal should be assessed separately from its evidence about a fund.

THE IDEA

The text describes two extreme scenarios for the effect of advertising on investor behavior. In the optimistic 'free-market economist' dream, advertising educates consumers about low costs, diversification, and long-term investing, helping them find their optimal portfolio. In the pessimistic 'behavioral economist' nightmare, advertising encourages overconfidence, disregards fees, and emphasizes past performance despite its lack of predictive power. The authors report findings by Henrik Cronqvist that align more with the pessimistic scenario: fund advertising rarely highlights fees and heavily promotes past returns, which do not guarantee future performance or establish that the fund is a suitable choice. Such ads steer investors into portfolios with higher fees, higher risk, and lower expected returns. A concrete example is an ad featuring actor Harrison Ford promoting a Swedish fund, implying his celebrity status qualifies him to give investment advice.

When to use it

When evaluating a fund advertisement, examine the return claim’s context alongside fees, diversification, strategy, and risk.
If an investment ad features a celebrity, question whether that person has relevant expertise or if the endorsement is purely emotional.
When choosing a pension plan, read the fine print on fees and investment strategy rather than being swayed by promotional materials.
As a financial advisor, educate clients about common advertising tactics that exploit cognitive biases like the affect heuristic and recency bias.

FROM THEORY TO EVERYDAY LIFE

In practice

Harrison Ford Ad

A Swedish fund advertisement featured Harrison Ford with the tagline 'Harrison Ford can give you a better pension.' The endorsement draws attention to the actor rather than supplying evidence about fees, diversification, or suitability.

Cronqvist Study Findings

In the authors’ account, Cronqvist found that fund advertisements rarely emphasized fees and often promoted past performance. They report that advertising influenced portfolio choices toward higher fees, greater risk, and lower expected returns.

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A MOMENT TO REFLECT

Put it to work.

How might advertising affect your own investment decisions? Can you recall a time when an advertisement influenced your choice of a financial product?
Why might a past-return figure be persuasive even when it does not establish how a fund will perform in the future?
What regulatory measures could ensure that financial advertisements provide more useful information to investors?