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Behavioral finance turned on its head

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Financial Times columnist John Authers recently apologized to U.K. mutual fund investors for regularly haranguing his Brit compatriots for acting dumb; they buy into funds just when their performance looks best – just in time to ride the performance downward.

However, according to Authers, it now appears the timing was, in fact, a smart move. Research by academics at City University’s Cass Business School in London shows that in the UK from 1991 to 2000, funds in receipt of new flows of money outperformed their peers. The effect is small, but it is statistically significant, and it persists.

In other words, he says, investors tend to choose the funds that will do best. Even more good news for those who worried about retail investors is that, in the UK at least, individual money is exactly as smart as money from institutions. If the professionals are better informed than Joe Public, it does not show, at least when it comes to their choice of mutual funds.