The Evidence-Based Investor

Video: Don’t assume outperformance is down to skill

Posted by Robin Powell on August 4, 2015

“Men resist randomness, markets resist prophecy.” Maggie Mahar

 

The need to make sense of things is a basic human instinct. We want to feel we understand what’s happening around us. So we create our own order. We invent narratives and look for patterns that validate our point of view.

In truth, though, the world is much more complex and life far more chaotic than many of us are willing to admit, either to ourselves or to other people.

The financial markets are a case in point. We naturally want to grasp what’s going on, or else put our faith in someone with a better idea than we have. But markets react to new information, to random events which are, by definition, completely out of our control.

Research conducted at the University of Mannheim underlines this very problem. In a study entitled Fooled by Randomness: Investor Perception of Fund Manager Skill, researchers found that investors tend to base decisions on which funds to invest in on past performance. Yet they are far too quick to assume that healthy returns are the result of investment skill, when in fact they have more to do with the fund’s risk profile and the extent to which it benefits from random chance.

 

This video was produced by Regis Media, a boutique provider of content and targeted social marketing for evidence-based advisers.

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Robin Powell

A journalist and broadcaster, Robin Powell is a campaigner for positive change in the investing industry. He runs a communications company for the evidence-based investing sector called Regis Media.

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