The Index Fund Rationality Paradox and Categorical Thinking

Tarassov E.B., 2017b, The Index Fund Rationality Paradox and Categorical Thinking, HSE Economic Journal, vol. 21, no. 3, pp. 412 - 433.

22 Pages Posted: 29 Dec 2016 Last revised: 4 Dec 2018

See all articles by Evgeni Tarassov

Evgeni Tarassov

National Research University Higher School of Economics - Faculty of Economics

Date Written: November 1, 2016

Abstract

During the last twenty years, literature has emerged researching into why an individual investor invests in high-fee index Mutual Funds (MF) while there are funds tracking the same index charging remarkably lower commissions. Another strand of literature has explored why those Exchange-Traded Funds (ETF) which follow the same index more effectively have still not replaced identical index mutual funds.

This paper reports further research exploring the possible reasons for the index fund rationality paradox. The experiment, conducted among first generation High Net Worth Individuals (HNWI) and economics and finance students from leading universities, demonstrates that none of the known theories explaining this paradox can be considered the main reason. The paper provides the rationale why the underlying explanation for this paradox might be people’s predisposition for categorical thinking or stereotyping. In addition, the article formulates the basic principles for minimizing the negative effect of categorical thinking concerning non-optimal index-investing behavior. In conclusion, some ideas for further research are proposed.

Keywords: Index mutual funds, ETF, Non-optimal index investing, HNWI, Mental representation

JEL Classification: G02, G11, G23

Suggested Citation

Tarassov, Evgeni, The Index Fund Rationality Paradox and Categorical Thinking (November 1, 2016). Tarassov E.B., 2017b, The Index Fund Rationality Paradox and Categorical Thinking, HSE Economic Journal, vol. 21, no. 3, pp. 412 - 433.. Available at SSRN: https://ssrn.com/abstract=2891004 or http://dx.doi.org/10.2139/ssrn.2891004

Evgeni Tarassov (Contact Author)

National Research University Higher School of Economics - Faculty of Economics ( email )

Shabolovka 26
Moscow, 119049
Russia

Register to save articles to
your library

Register

Paper statistics

Downloads
79
Abstract Views
471
rank
312,292
PlumX Metrics