When Risk and Return are Not Enough: The Role of Loss Aversion in Private Investors' Choice of Mutual Fund Fee Structures

We analyze why investors chose funds with performance fees even if expected fees are higher than in a fund with a pure management fee. Performance fees are meant to influence performance positively but they can also lead to a higher fund risk. The expected higher performance cannot fully account for the height of the performance fees chosen in our survey study. Controlling for various other explanations, we find that loss aversion is a main driver for the propensity to chose a performance fee fund.