Editing Passive management (section)

== Rationale for passive investing ==
The concept of passive management is [[counterintuitive]] to many investors.<ref name=three/> The rationale behind indexing stems from the following concepts of financial economics:<ref name=three/>

# In the long term, the average investor will have an average before-costs performance equal to the market average.  Therefore, the average investor will benefit more from reducing investment costs than from trying to beat the average, and passive investments generally charge lower fees than actively-managed investments. This argument is commonly known as William Sharpe's zero-sum game theory.<ref name=":0" />
# The [[efficient-market hypothesis]] postulates that equilibrium market prices fully reflect all available information, or to the extent there is some information not reflected, there is nothing that can be done to exploit that fact. It is widely interpreted as suggesting that it is impossible to systematically "beat the market" through [[active management]],<ref name="five">{{cite web|title=Efficient Market Hypothesis - EMH|url=https://www.investopedia.com/terms/e/efficientmarkethypothesis.asp|publisher=Investopedia|access-date=20 May 2010}}</ref> although this is not a correct interpretation of the hypothesis in its weak form. Stronger forms of the hypothesis are controversial, and there is some debatable evidence against it in its weak form too. For further information see [[behavioural finance]].
# The [[principal–agent problem]]: an [[Investment|investor]] (the principal) who allocates money to a portfolio manager (the agent) must properly give [[incentive]]s to the manager to run the portfolio in accordance with the investor's [[Risk#In finance|risk]]/[[Return on investment|return]] appetite, and must monitor the manager's performance.<ref>{{cite magazine|url=http://www.businessweek.com/articles/2014-12-18/mutual-fund-managers-2014-is-another-flop|archive-url=https://web.archive.org/web/20141219073911/http://www.businessweek.com/articles/2014-12-18/mutual-fund-managers-2014-is-another-flop|url-status=dead|archive-date=December 19, 2014|title=Mutual Fund Managers' 2014 Is Another Flop|magazine=Businessweek}}</ref><ref name=six>[http://www.referenceforbusiness.com/encyclopedia/A-Ar/Agency-Theory.html Agency Theory, Agency Theory Forum]. Retrieved May 20, 2010.</ref>

Advocates for passive management argue that performance results provide support for Sharpe's zero-sum game theory.<ref name=":0" /> There are two prominent reports that compare the performance of index funds with the performance of actively-managed funds, the SPIVA (S&P Indexes Versus Active Funds) report<ref>{{Cite web|title=SPIVA report|url=https://www.spglobal.com/spdji/en/research-insights/spiva/}}</ref> and the Morningstar Active-Passive Barometer.<ref>{{Cite web|title=Morningstar Active-Passive Barometer|url=https://www.morningstar.com/lp/active-passive-barometer}}</ref>