Q4. Principle Business Enterprises (PBE) offers a 401(k) defined contribution plan for its participants. Mark Goetz, director of human resources for PBE is constantly looking for ways to improve the plan. Recently, PBE added the Republic Small Cap Value Fund and the Republic Emerging Market Funds to its line-up, bringing the number of investment options in the plan up to 14. Sherry Bailey and Yumin Li are both participants in the plan. Over lunch, Bailey and Li discuss the 401(k) plan.
Bailey states, “I am excited about the new investment options in the plan. I think I am going to reallocate my 401(k) dollars between those two new funds. Since they were just added to the plan, they have to be good.”
Li states, “With 14 fund choices, I’m not sure how to allocate my funds. I think I am going to leave my allocation where it is.”
Which of the following characteristics of a DC plan participant’s portfolio is most reflective of Bailey’s comment and Li’s comment respectively?

          Bailey's Comment                       Li's Comment

A)  Endorsement effect                     Status quo bias

B)  Status quo bias                             Status quo bias

C)  1/n diversification heuristics      Endorsement effect

答案和详解如下：

Correct answer is A)

Bailey’s comment is reflective of the endorsement effect, which refers to the misconception by plan participants that by providing a list of investment options, the sponsor is endorsing them as good investments. The endorsement effect is particularly prevalent if the sponsor adds new investment options. Li’s comment is reflective of the status quo bias, which refers to a participant’s tendency to make an original allocation and not change it. Often times, a participant can be overwhelmed by the number of available investment options, which leads to the status quo bias. Note that 1/n diversification heuristics refers to an allocation being divided equally among the number of fund options, while cognitive dissonance refers to a person’s actions differing from a person’s beliefs.

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