Prometheus 6

The quote of note isn't from the New York Times article I'm linking:

"So many individual investors have no idea they're losing possibly hundreds of thousands of dollars," Bhagat said. "It begs the question of what aspects of the financial marketplace and which consumer traits are responsible for this phenomenon."

Where does it come from? One of the four links below.

One State Talks About Shifting Out of Pensions
By MARY WILLIAMS WALSH

Just days after the president of a huge California pension fund was ousted, some California officials are proposing that the state get out of the pension business and give state and municipal workers a 401(k) plan instead.

Such a move would echo proposals by the Bush administration and some members of Congress to divert a portion of the Social Security payroll tax away from the federal trust fund and into individual savings accounts. Rather than paying retirees a pre-determined benefit based on a common formula, as Social Security now does, the administration is proposing to give workers the opportunity to manage some of their retirement money themselves.

Why Most Stock Investors are Losers

The Courage of Misguided Convictions: The Trading Behavior of Individual Investors

The Common Stock Investment Performance of Individual Investors

And this one is from 1998, but far less technical than the other three linked above:
Equity Index funds pay off
The next time you're out on the golf course and your partner begins bragging about his hot-shot fund manager and his high return on investment, be skeptical.

That investor is probably better off in equity index funds, and his fund manager is likely to know it.

So says Donald Lichtenstein, professor in CU-Boulder's College of Business and Administration.

"I was clueless about this index fund versus actively managed fund idea four or five years ago," Lichtenstein said. "Then I started doing research."

His new study, conducted with CU finance Professor Sanjai Bhagat and Georgia State Professor Patrick Kaufmann, is "Toward an Understanding of Inefficient Consumer Mutual Fund Investment Decisions: Implications for Public Policy." The report provides well-known reasons from the academic finance literature why investors should invest in index funds, and then the authors identify psychological and behavioral aspects that keep investors from doing the right thing.

"The data all support the notion that long-term investors continue to pour money into the actively managed equity mutual fund market, despite an abundance of empirical historical evidence that only a minority of fund managers outperform the market in a typical year - and fewer still achieve above-average market returns for their investors year after year."

…Why do investors insist on paying fund managers when they are not getting what they pay for? Lichtenstein, Bhagat and Kaufmann identify 18 psychological and behavioral propositions they contend may help account for this situation.

…Following are some of the behaviors believed to explain why investors use actively managed, instead of passive, funds:

• Lack of knowledge: Many investors are unaware that the average market return is often the appropriate reference point to use when evaluating actively managed mutual fund returns.
• Broker's influence: In light of the complexity of the market, some investors blindly follow the advice of their broker. Because selling passively managed index funds is far less profitable to brokers than managed funds, there is a strong financial incentive to push managed funds.
• Discomfort with average returns: Investors interpret average returns as sub-standard. Average returns are what passively managed index funds produce, so some people choose to take a chance at higher market returns produced by some - but relatively few - actively managed funds.
• Investor confidence: Active investors also are more likely to believe that the ability to pick high performing stocks reflects a skill, and hence, are more prone to attempt to master the market by beating the odds instead of playing the odds.
• Influence of past performance: The financial media run articles devoted to rating the best and worst performing mutual funds. Such ratings, which are based on past performance, have little predictive value, yet consumers often rely on them because they believe these funds will continue to perform well in the future.
• Price: Many investors do not factor in - or don't even know - fund costs when making investment decisions. Estimates of the difference in cost between actively and passively managed funds fall in the range of 1.7 percent. The difference represents the margin managers must add to the performance of their funds in order to break even with passively managed funds.
• Business publications: Investment magazines and news papers perpetuate the so-called "need" to use managed funds. If everyone used index funds, there wouldn't be a need for these publications.
• The search for perfection: Some investors think they can beat the market. Some can. But in the long run, index funds will make them more money.