A seminar by Associate Professor Jordan Moore from Rowan University
Title: Structuring Management Fees for Prospect Theory Investors: Experimental Evidence
Abstract: Suppose an investment manager has discretion to allocate client management fees over a calendar year. If her client has prospect theory preferences over a sequence of quarterly investment gains and losses net of fees and anchors these gains and losses to the previous account balance, then the optimal timing of management fees can increase client satisfaction. When the manager structures fees to target prospect theory preferences, the client will increase his future savings rate and expected retirement wealth and the manager will earn higher future management fees. The optimal strategy applies the annual management fee after a quarter with sufficiently large portfolio gains. I administer a laboratory experiment on Amazon Mechanical Turk to test whether subjects prefer holding investment portfolios with management fees optimally structured to target prospect theory preferences. Subjects invest 13% more of their wealth in equities when the equity fund management fees are structured to target prospect theory preferences. This difference is not explained by demographic characteristics or psychological traits known to influence financial decision making.
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