How Active Management Survives

Financial Planning Review, forthcoming 2019.

23 Pages Posted: 20 Jun 2018 Last revised: 28 Mar 2019

See all articles by J.B. Heaton

J.B. Heaton

J.B. Heaton, P.C.

Ginger Pennington

Northwestern University, Department of Psychology

Date Written: March 14, 2019


There is much evidence that passive equity strategies dominate active equity management, but many investors remain committed to active investing despite its poor relative performance. We explore the behavioral-economic hypothesis that investors fall prey to the conjunction fallacy, believing good returns are more likely if investment is accompanied by hard work. This is an especially plausible manifestation of the conjunction fallacy, because in most areas of life hard work leads to greater success than laziness. Our internet survey results show that from 30% to over 60% of higher-income, over-30 individuals fall prey to the conjunction fallacy in this context, raising significant questions for law and regulatory policy, including whether actively-managed equity products should carry warnings, at least for retail investors.

Keywords: Investor Psychology, Behavioral Finance, Active Management, Passive Management, Irrational Investors, Asset Management

JEL Classification: G11, G18, G23, G24, G40, G41

Suggested Citation

Heaton, J.B. and Pennington, Ginger, How Active Management Survives (March 14, 2019). Financial Planning Review, forthcoming 2019.. Available at SSRN: or

J.B. Heaton (Contact Author)

J.B. Heaton, P.C. ( email )

20 West Kinzie
17th Floor
Chicago, IL 60654
United States
(312) 487-2600 (Phone)


Ginger Pennington

Northwestern University, Department of Psychology ( email )

2029 Sheridan Road
Swift Hall 102
Evanston, IL 60208
United States

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