Bounded Rationality in the Sale and Purchase of Managed Funds

Abstract

The under-use of lower cost and higher performing passively managed funds by consumers appears to be an example of market failure that is leading to consumer detriment. These investing decisions do not appear to be economically rational behavior by investors. This article considers some possible explanations for this phenomenon from the behavior finance literature, and proposes some possible public policy responses.

Keywords: bounded rationality, behavioural finance, market failure, managed fund, mutual fund, index fund, active fund, passive fund