Must-Read: This is what Akerlof and Shiller’s Phishing for Phools is about…
: Number-Crunchers Lift Lid on Investor Choice: “Retail investors…fatally drawn to chasing performance…
…buying high, selling low… heighten[ing] the peaks and lower[ing] the troughs…. In aggregate, all the money attracted by funds in that era went to funds that could show the strongest ratings (which are largely a function of performance)…. Past performance does not predict future performance. But it utterly controls what the consumer will ultimately buy….
Given a choice between two otherwise identical funds, Americans will take the cheaper one. Europeans will not…. In the US, investment advisers tend to be paid by fee, rather than commission, and have no incentive to advise otherwise…. But Americans are not as smart as all that. High turnover… is a bad idea…. Yet funds with a high turnover in the US tend to attract more than 0.5 per cent more in inflows each month…. Most counter-intuitively, and alarmingly… older than average funds… suffer outflows at a rate of 2.77 per cent of their assets each month….
Ultimately, funds are sold the same way as other branded goods. Marketers spot where the demand is moving, and launch something new that can be hyped. All the interest and selling action focuses on recent launches, while older products are gradually neglected, and watch money ebb out over time. It is not a great way to allocate capital…