.. the growing use of passive investment vehicles reflects the times in which we live. With algorithms helping determine which online ads we’re exposed to each day and new metrics being invented all the time to aid in arenas as diverse as business, politics, and sports, perhaps it should come as no surprise that more people are willing to rely on an inexpensive, systematic, formula-based approach to investing rather than on the judgment and decision-making ability of a living, breathing fund manager.
The article also talks about the obvious next step – that the simple index tracking form of passive investing will be supplemented with smarter algorithms for those investment decisions.
More recently, increasing attention has been paid to alternative indexing approaches–so-called smart beta–that are built around specific factors (stock price/earnings ratios, company performance, share-price volatility, to name a few). Some consider this a hybrid of indexing and active management styles.
This seems to be a case where the human as a hazard point of view is winning and the design choice has been to upfront capture human insights in algorithms (as in smart beta approaches). Going back to the factors that influence the design choice, the factor that matters here is the most is the type of decision that is being influenced. Investment returns is not about managing extreme decisions but improving the average across several small decisions with well-established rules of good vs. bad decisions.