How could any rational investor — one who prefers more value in the investment product purchased to less, and lower cost to higher cost — possibly choose active fund management over passive management?

This question is explored in a new research paper, “How Active Management Survives,” authored jointly by J. B. Heaton, a professor at the University of Chicago Law School, and Ginger L. Pennington, a professor of psychology at Northwestern University. The authors explore the question of what species of irrationality is causing this phenomenon.

The answer is important, because this irrationality drives the profits of one of the world’s most profitable industries — perhaps the most profitable — as well as the losses of its clients.

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