After studying this chapter, you should be able to: Define strategy; define planning and explain its purpose; differentiate between strategic, operational, and tactical plans; explain the planning process. | Judgment in Managerial Decision Making 8e Chapter 9 Common Investment Mistakes Copyright 2013 John Wiley & Sons 1 Active Fund Management 25% of funds outperform market Past performance poorly predicts future Returns limited by high fees Hedge funds Rather than purchase an index fund and passively allow it to fluctuate with the market over time, many people choose to invest in mutual funds and hedge funds that are actively managed by so-called experts. One would presume that these financial experts should be able to outperform the market, but the evidence suggests that in a given year, only 25% of mutual funds outperform the market. Even more troubling is the fact that fund performance is volatile from year to year and past performance does not predict future performance well. Thus, among the few funds who do outperform the market one year, the majority of then will fail to outperform the market the next year. One reason that mutual funds typically fail to outperform the market is . | Judgment in Managerial Decision Making 8e Chapter 9 Common Investment Mistakes Copyright 2013 John Wiley & Sons 1 Active Fund Management 25% of funds outperform market Past performance poorly predicts future Returns limited by high fees Hedge funds Rather than purchase an index fund and passively allow it to fluctuate with the market over time, many people choose to invest in mutual funds and hedge funds that are actively managed by so-called experts. One would presume that these financial experts should be able to outperform the market, but the evidence suggests that in a given year, only 25% of mutual funds outperform the market. Even more troubling is the fact that fund performance is volatile from year to year and past performance does not predict future performance well. Thus, among the few funds who do outperform the market one year, the majority of then will fail to outperform the market the next year. One reason that mutual funds typically fail to outperform the market is that their managers demand high fees for their services. Without accounting for fees, mutual funds perform about the same as market index funds, but the high fees of these funds depresses the returns that they can yield. People also frequently invest in hedge funds, as their managers can maintain secrecy about their investment strategies. However, hedge fund managers charge typically charge even higher fees than mutual fund managers and as a result, the wealthy investors that typically invest in hedge funds end up making investments that perform far worse than the market. The goal of this chapter is to better understand why investors consistently choose to invest in these funds that earn lower returns than market funds. 2 The Psychology of Poor Investment Decisions Overconfidence Optimism Denying random events Anchoring, status quo, and procrastination Selling winners and keeping losers In explaining why people continually make decisions that cause them to earn lower financial returns .
