If cutting investing costs is so important, why don’t more people do it?

The fund industry again has tried to take credit for the declining fees paid by mutual-fund investors. In fact, fee payments are falling because investors are drawn to those funds that charge less, not because the fund companies are making meaningful fee cuts.

But the data showed that investors, nonetheless, continue to pay far more than they need to. The average fee paid on stock funds was 0.91 percent, while many high-performing funds charge 0.20 percent or less.

New research by professors at Harvard, Yale and the Wharton School sheds light on this behavior.

Last summer, James J. Choi of Yale, David Laibson of Harvard and Brigitte C. Madrian of Wharton assembled Harvard undergraduate students and first-year Wharton MBA students for an experiment to see if students understood the effect of fees on their investment returns.

Each student was given a hypothetical stake of $10,000 and offered the chance to invest it in any combination of four mutual funds.

All four investments were index-style mutual funds that own the stocks in the Standard & Poor’s 500 index. That meant the funds’ performance would be identical, except that some charged higher fees than others. Fees pay for the fund’s staffing and other expenses, as well as the fund company’s profit.

The cheapest was the Allegiant/Armada S&P 500 fund. Its one-year charges would total $309 on a $10,000 investment. The UBS S&P 500 Index fund charged $320, the Mason Street Index 500 fund $555 and the Morgan Stanley S&P 500 fund $589.

All the students were given the prospectuses provided real investors.

Half the students also were given a “fee sheet” that highlighted fee information from the prospectuses and shown how to calculate fees’ effect on investment returns. The other half were instead given a “returns sheet” that showed the average annual returns of each fund from the date it was started, but not accounting for the effect of fees.

This information was meaningless because the funds’ holdings were identical. The returns varied only because the funds had been started at different times. In the future, each fund would produce exactly the same returns – until the fees were deducted.

In fact, the researchers chose these funds because those with the highest returns also had the highest fees, making them the worst investments.

A knowledgeable investor would put all $10,000 into the fund with the lowest fees. But only about one in five students did that. Most chose to divide their money among two or more funds – a pointless diversification given the funds’ identical holdings.

“Many people do not realize that mutual fund fees are important in making an investment decision,” the researchers concluded.

Clearly, the self-defeating impulse to chase after funds that did well in the past is blinding. If students at our top universities can’t see through meaningless performance data, how can we expect ordinary investors to?