Stillman Associate Professor Jennifer Itzkowitz found that despite due diligence, investment choices are made as a result of a much simpler process: investors choose the first funds that appear on a list of investment plans that they find acceptable. These funds are often listed in alphabetical order instead of being sorted by a strategic metric. This is contrasted with the recommended process of surveying all available options and determining which is the optimal choice.
Itzkowitz, in the Department of Finance, will have her research on the methodology used to choose investments published in an upcoming issue of the peer-reviewed journal, The Financial Review.
This research is the product of intercollegiate collaboration with finance professionals including Dr. Jesse Itzkowitz, vice president of Ipsos Behavioral Science Center, Professor Thomas Doellman from Saint Louis University and Professor Sabuhi Sardarli from Kansas State University.
Itzkowitz and her fellow researchers focused their study by analyzing the investment behavior of individuals choosing 401(K) plans from nearly 7,000 companies. The data revealed several insights. Itzkowitz learned that if the 401(K) plans were listed in order of expense ratios, a measure for how much of a fund is used for administrative and operating expenses, investors could earn an additional $20,440 in retirement savings. If a mutual fund's name was moved up within the investment list by 10 positions, it increased investment in the fund by $653,000. Furthermore, Itzkowitz found that the more complicated and abstract a 401(K) plan is - those that require extra attention to yields, annual returns and relevant financial ratios - the poorer the decisions individuals made.
Surprisingly, this phenomenon was observed not only among novice investors, but also among employees within the financial industry. When featured on The Academic Minute, Itzkowitz further expanded on her research results by attributing this irrational investing behavior to "satisficing." Satisficing is the practice of achieving satisfactory results because to aim for a greater result requires information and time that investors do not have. The term was coined by Nobel-Laureate Economist Herbert Simon in 1982 and has since been the subject of discussion.
"Simply put, investors are lazy. Individuals who invest at either a novice or professional level both exhibit evidence of irrational investing tactics," said Itzkowitz. "Investors need to be aware of the dangers of satisficing and learn not to choose the first option acceptable to them."
Itzkowitz's publication in The Financial Review will join a list of her recent peer-reviewed work. In 2016, she published ABCs of Trading: Behavioral Biases affect Stock Turnover and Value alongside co-authors Jesse Itzkowitz and Scott Rothbort. One year later, Borrowing beyond Borders: Foreign Assets, Lender Choice, and Loan Pricing in the Syndicated Bank Loan Market was published in Journal of Corporate Finance and Name-Based Behavioral Biases: Are Expert Investors Immune? was published in the Journal of Behavioral Finance.
Itzkowitz's research will assuredly impact the world of finance by cautioning everyday investors of the risks uninformed investing can pose. Her work is reflective of the Stillman School of Business' mission by transforming investment concepts into sound business practice.