Why Do Pensions Ignore Evidence?

There are many well-known anomalies in finance. The most notable of these anomalies include the momentum effect, the low-volatility effect (in which high-volatility stocks produce lower returns on average than low-volatility stocks) and the poor performance of IPOs, penny stocks, stocks in bankruptcy and small growth stocks with low profits.

But perhaps the biggest anomaly is why the majority of investors—both individual and institutional—continue to favor actively managed funds when there is an overwhelming body of evidence demonstrating that, even though active management is a game that’s possible to win, the odds of outperformance are so poor that it’s not prudent to try.

That evidence, and the logic associated with it, is why author Charles Ellis called active management the loser’s game. In his 1998 book, “Winning the Loser’s Game,” Ellis explained that the surest way to win a loser’s game (such the craps table or the roulette wheel in a Las Vegas casino) is to choose not to play.

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