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Expensive Choice: What Wall Street Can Learn From Costco

Our new research on how investors perceive costs and diversification shows that giving investors too many options can be costly in the long run. To fix this, we think the financial services industry can help investors by taking a cue from an unlikely source: Costco.

Our experiment found that:
  • When investors are given the option, they place a significant portion of their money into high-cost investments when nearly identical low-cost options are available
  • Many investors, when given the choice, may not be as motivated to buy low-cost funds as macro trends imply
  • Investors have an incomplete understanding of what diversification is, and because of this when selecting investments, they use a decision-making shortcut