Index funds should be expected to underperform the index

Hanke, Michael; Schredelseker, Klaus

doi:10.1080/17446540802599689

Cited by 7 publications

(1 citation statement)

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“…In a market which is less than strong-form efficient, passive decision making is a rational course of action for traders, but it is limited: with too many passive traders the strategy becomes self-destructive (Hanke and Schredelseker, 2010). If the net demand of passive traders is a random variable with μ = 0 and σ 2 > 0 whose absolute amount will be higher the more passive investors are in the market, their actions are no longer independent of market prices: passive investors tend to buy when the market is overpriced (because they buy) and tend to sell when the market is underpriced (because they sell).…”

Section: The Private Value Of Information In a Competitive Marketmentioning

confidence: 99%

Pascal's Wager and Information

Schredelseker

2014

Journal of Forecasting

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Should we make financial forecasts? The usual answer looks like Pascal's wager: we don't know whether God exists; who erroneously believes loses nothing, who correctly believes wins everything; who correctly disbelieves, gains nothing, who erroneously disbelieves loses everything. Believing is thus a dominant choice. Turned to finance: markets are efficient or not. In an efficient market forecasters and non‐forecasters win nothing; in a non‐ efficient market forecasters win and non‐forecasters lose. Forecasting is rational if inefficiencies have a probability > 0. We use an agent‐based approach in studying the information value in a market with endogenous prices. We show that in inefficient markets rational traders don't make forecasts and an improvement in public information may even be harmful for the users. On average, an investor who has no information (index investor) performs like the market does; it is impossible that all others—those who know more than nothing—perform better. Pascal's wager does not apply. Copyright © 2014 John Wiley & Sons, Ltd.

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Section: The Private Value Of Information In a Competitive Marketmentioning

confidence: 99%