Fooled by Randomness: Investors Don't Properly Evaluate Fund Manager Skill

Investors are “Fooled by Randomness” and when chasing returns to make investment decisions in funds more often than not do not take into account key considerations that paint a true picture of the manager’s skill, says a study.

In the paper “Fooled by Randomness: Investor Perception of Fund Manager Skill,” the paper’s authors assert that the role luck plays in high return generation is not given proper weighting in investment evaluation nor is volatility given appropriate consideration.

Fund Manager Skill: Investors overly subscribe to mutual funds

The study found that investors overly subscribe to mutual funds that underperform the market. “There is...