Key Words: Robert Shiller: Passive investing is a ‘pseudoscience’ and it’s bad for markets

Robert Shiller, the Nobel Prize-winning Yale economics professor, is clearly no fan of passive investing, which he describes as a “chaotic system” that’s taking a toll on the business landscape across the United States.

‘The strength of this country was built on people who watched individual companies. They had opinions about them. All this talk of indexes, it’s a little bit diluting of our intellect. It becomes more of a game.’

Robert Shiller

The increasingly popular passive approach, of course, is basically when investors seek to mirror the performance of an index via a low-cost tracking fund, rather than looking to beat the market through active management.

Shiller, in an interview this week with CNBC, likened passive investing to coming up to a green light at an intersection and crossing the street without looking both ways.

“The problem is that if you are talking about passive indexing, that is something that is really free-riding on other people’s work,” he said. “So people say, ‘I’m not going to try to beat the market. The market is all-knowing.’ But how in the world can the market be all-knowing, if nobody is trying — well, not as many people — are trying to beat it?”

And it’s true. Not as many people are trying to beat the market these days. Investors are pouring record amounts of money into passive funds as the market keeps pushing into uncharted territory.

Read: Passive investing is changing the stock market in ways most investors don’t realize.

According to Morningstar, passive funds attracted inflows of $428.7 billion over 2016, while actively managed funds saw outflows of $285.2 billion, a trend that has occurred for nearly 10 years.

“It’s kind of pseudoscience to think these indexes are perfect, and all I need is some kind of computer model instead of thinking about business,” he told CNBC.

Watch the full interview:

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