If the stockmarket is efficient, and if few investors can beat the market, why are most portfolios managed actively (seeking mispriced assets) rather than passively (matching an index)? This article looks at three possible explanations, favouring an explanation in terms of cognitive psychology.
Get full access to this article
View all access options for this article.
References
1.
AlbertJ. (1993). “Comment”Journal of the American Statistical Association, 88, 1184–1188.
2.
AlbrightS.C. (1993). “A Statistical Analysis of Hitting Streaks in Baseball”Journal of the American Statistical Association, 88, 1175–1183.
3.
AlbrightS.C. (1993). “Rejoinder”Journal of the American Statistical Association, 88, 1194–1196.
4.
AyeroffF.AbelsonR.P. (1976). “ESP and ESB: Belief in Personal Success at Mental Telepathy”Journal of Personality and Social Psychology, 34, 240–247.
5.
BatsonC.D. (1975). “Rational Processing or Rationalization?: The Effect of Disconfirming Information on a Stated Religious Belief”Journal of Personality and Social Psychology, 32, 176–184.
6.
BernD.J. (1967). “Self Perception: An Alternative Interpretation of Cognitive Dissonance Phenomena”Psychological Review, 74, 183–200.
7.
BenassiV.A.SweeneyP.D.DrevnoG.E. (1979). “Mind Over Matter: Perceived Success at Psychokinesis”Journal of Personality and Social Psychology, 37, 1137–1386.
8.
BudescuD.V. (1987). “A Markov Model for Generation of Random Binary Sequences”Journal of Experimental Psychology: Human Perception and Performance, 13, 25–39.
FamaE.F. (1970). “Efficient Capital Markets: A Review of Theory and Empirical Work”Journal of Finance, 25, 383–417.
11.
FamaE.F. (1991). “Efficient Capital Markets: II”Journal of Finance, 46, 1575–1617.
12.
FestingerL.CarlsmithJ.M. (1959). “Cognitive Consequences of Forced Compliance”Journal of Abnormal and Social Psychology, 58, 203–210.
13.
FestingerL.RieckenH.W.SchachterS. (1964). When Prophesy Fails. New York: Harper and Row.
14.
FischhoffB. (1975). “Hindsight≠Foresight: The Effect of Outcome Knowledge on Judgment Under Uncertainty”Journal of Experimental Psychology: Human Perception and Performance, 1, 288–299.
15.
FischhoffB.BeythR. (1975). “ ‘I Knew It Would Happen’ Remembered Probabilities of Once-Future Things”Organizational Behavior and Human Performance, 13, 1–16.
16.
GilovichT.ValloneR.TverskyA. (1985). “The Hot Hand in Basketball: On the Misperception of Random Sequences”Cognitive Psychology, 17, 295–314.
GrinblattM.NewmanMilgate, P. M.EatwellJ., eds. (1992). The New Palgrave Dictionary of Money and FinanceLondon: Macmillan, 3, 133–135.
19.
HawkinsS.A.HastieR. (1990). “Hindsight: Biased Judgments of Past Events After the Outcomes Are Known”Psychological Bulletin, 107, 311–327.
20.
LakonishokJ.ShleiferA.VishnyR.W. (1992). “The Structure and Performance of the Money Management Industry”Brookings Papers on Economic Activity: Microeconomics, 339–391.
21.
LangerE.J. (1975). “The Illusion of Control”Journal of Personality and Social Psychology, 32, 311–328.
22.
LangerE.J.RothJ. (1975). “Heads I Win, Tails It’s Chance: The Illusion of Control as a Function of the Sequence of Outcomes in a Purely Chance Task”Journal of Personality and Social Psychology, 32, 951–955.
23.
LordC.G.RossL.LepperM.R. (1979). “Biased Assimilation and Attitude Polarization: The Effects of Prior Theories on Subsequently Considered Evidence”Journal of Personality and Social Psychology, 37, 2098–2109.
24.
MalkielB.G. (1995). “Returns from Investing in Equity Mutual Funds 1971 to 1991”, Journal of Finance, 50, 549–572.
25.
OskampS. (1965). “Overconfidence in Case-study Judgments”Journal of Consulting Psychology, 29, 261–265.
26.
PrestonC.E.HarrisS. (1965). “Psychology of Drivers in Traffic Accidents”Journal of Applied Psychology, 49, 284–288.
27.
ReganJ.W.GosselinkH.J., Hubsch & UlshE. (1975). “Do People Have Inflated Views of Their Own Ability?”Journal of Personality and Social Psychology, 31, 295–301.
28.
RossL. (1977). “The Intuitive Psychologist and His Shortcomings: Distortions in the Attribution Process” In BerkowitzL., ed. Advances in Experimental Social Psychology. 10, New York: Academic Press.
29.
RussellD.JonesW.E. (1980). “When Superstition Fails: Reactions to Disconfirmation of Paranormal Beliefs”Personality and Social Psychology Bulletin, 6, 83–88.
30.
SmedslundJ. (1963). “The Concept of Correlation in Adults”Scandinavian Journal of Psychology, 4, 165–173.
31.
SternH.S.MorrisC.N. (1993). “Comment”Journal of the American Statistical Association, 88, 1189–1194.
32.
SvensonO. (1981). “Are We All Less Risky and More Skilful Than Our Fellow Drivers?”Acta Psychologica, 47, 143–148.
33.
TaylorS.E.BrownJ.D. (1988). “Illusion and Well-Being: A Social Psychological Perspective on Mental Health”Psychological Bulletin, 103, 193–210.
34.
TverskyA.KahnemanD. (1974). “Judgment under Uncertainty: Heuristics and Biases”Science, 185, 1124–1131.
35.
Van HulleC.L. Vanthienende BondtW. (1993). “Is the Stock Market Rational? An Investment Manager’s Guide to 25 Years of Efficient Markets Research”Tijdschrift voor Economic en Management, 38, 349–369.
36.
WardW.C.JenkinsH.M. (1965). “The Display of Information and the Judgment of Contingency”Canadian Journal of Psychology, 19, 231–241.
