Various long-term studies have shown that, net of fees, actively managed mutual funds tend to underperform the S&P 500. This mounting evidence has prompted various huge institutional investors, such as the California Public Employees' Retirement System (CalPERS) to move much of their assets into passive vehicles.
One problem some investors may have with evidence-based investing is passive vehicles are boring; they quietly provide investors with predictable, marketlike returns. By contrast, active investing is anything but boring. Picking stocks, or paying managers to do so, gives investors a thrill. For many, gambling is thrilling, and in many ways stock-picking is akin to gambling.
In his book "Your Money and Your Brain: How the New Science of Neuroeconomics Can Make You Rich," Jason Zweig, the renowned financial writer, discusses the brain chemistry of gambling. When people are seeking big winnings from long shots, Zweig writes, they get a rush of dopamine, a neurotransmitter associated with excitement and, potentially, with addiction. Such longshots would include picking stocks. Zweig's apt examination of the neurochemistry of gambling and how it applies directly to stock-picking is an eye-opener.