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Financial Flimflam

Why economic experts’ predictions fail
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IN DECEMBER 2010 I appeared on John Stossel’s television special on skepticism on Fox Business News, during which I debunked numerous pseudoscientific beliefs. Stossel added his own skepticism of possible financial pseudoscience in the form of active investment fund managers who claim that they can consistently beat the market. In a dramatic visual demonstration, Stossel threw 30 darts into a page of stocks and compared their performance since January 1, 2010, with stock picks of the 10 largest managed funds. Results: Dartboard, a 31 percent increase; managed funds, a 9.5 percent increase.

Admitting that he got lucky because of his limited sample size, Stossel explained that had he thrown enough darts to fully represent the market he would have generated a 12 percent increase— the market average—a full 2.5 percentage points higher than the 10 largest managed funds average increase. As Princeton University economist Burton G. Malkiel elaborated on the show, over the past decade “more than two thirds of actively managed funds were beaten by a simple low-cost indexed fund [for example, a mutual fund invested in a large number of stocks], and the active funds that win in one period aren’t the same ones who win in the next period.” (continue reading…)

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