The Tale of Two Irrationalities: Why Money Managers Keep Promising What They Cannot Deliver and Why Clients Keep Giving Them Their Money

33 Pages Posted: 5 Jun 2017

See all articles by Eben Otuteye

Eben Otuteye

Faculty of Management, University of New Brunswick

Mohammad Siddiquee

Department of Business Administration and Tourism and Hospitality Management, Mount Saint Vincent University

Date Written: June 3, 2017

Abstract

It appears intuitively plausible that actively managed funds by investment professionals should do better than a naïve strategy of buying a market index, which any uninformed person can do at much lower cost than paying a professional manager. However, the evidence points to the contrary: professional managers are not able to beat the index consistently and investors do not cease to patronize the services of those money managers. This paper reviews the overwhelming evidence that average investors engaged in passive indexing can do much better using the naïve approach on their own than soliciting the help of professional active portfolio managers. After questioning the ethics of charging fees for active management only to yield below average results, we examine some of the traditional explanations of this enigma. We then offer some behavioral explanations as to why this problem has persisted in the market for so long and discuss some possible behavioral-based policy prescriptions that may help to rectify this apparent market dysfunction.

Keywords: Market Index, Active Management, Closet Indexing, Management Fees

JEL Classification: G02, G11 G12, G18, G24

Suggested Citation

Otuteye, Eben and Siddiquee, Mohammad, The Tale of Two Irrationalities: Why Money Managers Keep Promising What They Cannot Deliver and Why Clients Keep Giving Them Their Money (June 3, 2017). Available at SSRN: https://ssrn.com/abstract=2980454 or http://dx.doi.org/10.2139/ssrn.2980454

Eben Otuteye

Faculty of Management, University of New Brunswick ( email )

Fredericton, New Brunswick E3B5A3
Canada

Mohammad Siddiquee (Contact Author)

Department of Business Administration and Tourism and Hospitality Management, Mount Saint Vincent University ( email )

166 Bedford Highway
Halifax, Nova Scotia B3M 2J6
Canada
902-457-6931 (Phone)
902-445-2582 (Fax)

HOME PAGE: http://www.msvu.ca

Register to save articles to
your library

Register

Paper statistics

Downloads
98
Abstract Views
487
rank
271,163
PlumX Metrics