Why Nobel-Prize winning economists reject active investing
- Robin Powell
- 5 hours ago
- 3 min read
This is the second article in our 12-part series on Mark Hebner's Index Funds: The 12-Step Recovery Program for Active Investors. If you missed the first instalment on the addictive nature of active investing, catch up before continuing.
In traditional recovery programs, the second step involves acknowledging a higher power. For investors trapped in the cycle of active management, that higher power comes in the form of Nobel Prize-winning economists whose research has systematically dismantled the myth that professional fund managers can consistently beat the market.
The evidence is overwhelming. Four Nobel laureates have delivered a unified message that should make any active investor pause: markets work, and trying to outsmart them is a fool's errand.
Harry Markowitz, who won the Nobel Prize in 1990 for developing modern portfolio theory, established the fundamental principle that investors should seek maximum expected return for a given level of risk. His work showed that diversification reduces risk without sacrificing returns — a concept that underpins passive investing.
William Sharpe, Markowitz's fellow 1990 Nobel winner, delivered perhaps the most damning verdict on active management with his assertion that "properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs." This isn't opinion; it's mathematical certainty.
Merton Miller, the third member of the 1990 Nobel trio, was even more direct: "Any pension fund manager who doesn't have the vast majority - and I mean 70% or 80% of his or her portfolio - in passive investments is guilty of malfeasance, nonfeasance or some other kind of bad feasance!"
Eugene Fama, awarded the Nobel Prize in 2013, reinforced this wisdom: "Markets are efficient, but there are different dimensions of risk and those lead to different dimensions of expected returns. That's what people should be concerned with in their investment decisions and not with whether they can pick stocks."
These aren't fringe academics making wild claims. These are the world's foremost experts in financial economics, backed by decades of rigorous research and peer-reviewed studies. Their work forms the foundation of the efficient market hypothesis — the idea that asset prices reflect all available information, making it virtually impossible to gain a sustainable edge through stock picking or market timing.
The academic evidence supporting passive investing stretches back to Adam Smith's "Wealth of Nations" in 1776 and includes groundbreaking contributions from Louis Bachelier's random walk theory (1900), Burton Malkiel's influential "A Random Walk Down Wall Street" (1973), and the pioneering index fund work of John Bogle and Rex Sinquefield.
For investors seeking their own "higher power," look no further than this wealth of Nobel Prize-winning research. As the document suggests, hopefully they will listen to the evidence published by academics and Nobel laureates rather than the "slick salesman of Wall Street products and services."
The choice is clear: trust decades of research produced by Nobel Prize-winning economists or continue funding other people's retirement instead of your own.
Learn more by reading or listening to Step 2 of Mark Hebner’s award-winning book Index Funds: The 12-Step Recovery Program for Active Investors here.
Next week: Step 3: examining the problems with active investing and the solutions that passive strategies provide
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