Keep Your Focus on Fees
Our semi-annual Active/Passive barometer shows that expenses are one of the only reliable predictors of success, writes Morningstar’s Ben Johnson.
A version of this article was published in the April 2016 issue of Morningstar ETFInvestor. Download a complimentary copy of ETFInvestor by visiting the website.
In his book “Thinking, Fast and Slow,”  Nobel Prize winning psychologist Daniel Kahneman discusses how he stumbled upon two different approaches to forecasting while working for Israel’s Ministry of Education to write a high school textbook about judgment and decision-making. Kahneman and his longtime collaborator, Amos Tversky, ultimately branded these two schools of forecasting “the inside view” and “the outside view.” The inside view is deeply personal. In constructing a forecast based on the inside view, we focus very narrowly on our own unique experiences and situation and extrapolate from there. (For example, I’m an above-average driver with a squeaky-clean driving history about to go on a short trip in fair weather. The odds of me getting in a fender bender are almost nil.) On the other hand, a forecast based on the outside view starts with a survey of the broader population and is refined based on any specifics regarding the circumstances. (Start with the odds of any driver getting in a fender bender regardless of driving history, the distance traveled, or weather conditions, and go from there.) The outside view is anchored to a base rate. Kahneman explains the concept of base rates in “Thinking, Fast and Slow”:
Ben Johnson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.