Economists’ Hubris – The Case of Equity Asset Management

Journal of Financial Transformation, Vol. 29, pp. 9-16

10 Pages Posted: 2 May 2010 Last revised: 7 Jan 2011

See all articles by Shahin Shojai

Shahin Shojai

Capco Institute

George Feiger

Aston Business School

Rajesh Kumar

Institute of Management Technology , Dubai

Date Written: April 29, 2010


In this, the fourth article in the economists’ hubris paper series we look at the contributions of academic thought to the field of asset management. We find that while the theoretical aspects of the modern portfolio theory are valuable they offer little insight into how the asset management industry actually operates, how its executives are compensated, and how their performances are measured. We find that very few, if any, portfolio managers look for the efficiency frontier in their asset allocation processes, mainly because it is almost impossible to locate in reality, and base their decisions on a combination of gut feelings and analyst recommendations. We also find that the performance evaluation methodologies used are simply unable to provide investors with the necessary tools to compare portfolio managers’ performances in any meaningful way. We suggest a novel way of evaluating manager performance which compares a manager against himself, as suggested by Lord Myners. Using the concept of inertia, an asset manager’s end of period performance is compared to the performance of their portfolio assuming their initial portfolio had been held, without transactions, during this period. We believe that this will provide clients with a more reliable performance comparison tool and might prevent unnecessary trading of portfolios. Finally, given that the performance evaluation models simply fail in practice, we suggest that accusing investors who look for raw returns when deciding who to invest their assets with is simply unfair.

Keywords: Asset management, Fund management, Modern Portfolio Theory, Performance evaluation models, Efficient Market Hypothesis

JEL Classification: G11, G14, G23

Suggested Citation

Shojai, Shahin and Feiger, George and Kumar, Rajesh, Economists’ Hubris – The Case of Equity Asset Management (April 29, 2010). Journal of Financial Transformation, Vol. 29, pp. 9-16, Available at SSRN:

Shahin Shojai (Contact Author)

Capco Institute ( email )

United Arab Emirates

George Feiger

Aston Business School ( email )

Aston Triangle
Birmingham, B47ET
United Kingdom
+44(0)121 204 3435 (Phone)

Rajesh Kumar

Institute of Management Technology , Dubai ( email )

Dubai International Academic City
Dubai, 345006
United Arab Emirates

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