There are a hundred good reasons why so much of the retail investor market has turned overwhelmingly to ETFs and index funds, eschewing managed mutual funds and old-fashioned stock-picking.

Broken ideas - light bulbStatistically, there is a lot of evidence that it’s the ‘best’ route (when done properly, like anything)… On average, mutual funds underperform the market in general. And while a healthy number outperform in a given quarter, or year… very few are able to consistently outperform over longer periods. There’s no telling if they’ll be the ones outperforming next year.

But from a marketing and psychology point of view, I don’t buy that we’ve had an irreversible paradigm shift. I don’t buy that active, opinionated money management is dead. I don’t know how long we’ll be here – culturally obsessed with the commodity that is index investing – but it won’t be forever.

I’ve got two big reasons to think this, and both are big elements in Nassim Nicholas Taleb’s bestseller, the Black Swan.

First is the human bias towards ‘stories’: as a species, we invent ‘rational’ stories (explanations) about why things happen, and then try – with almost no luck – to apply them to future unpredictable events, like the markets. Taleb thinks we’d do a lot better if we did this a lot less. And so I think he’d be pretty happy about the popularity of index investing. It’s ultimately about both the public and the professionals giving up on investing ‘stories’, refusing to believe that anyone has a meaningul idea that could lead to investing outperformance. But I suspect Taleb would be doubtful – as I am – that we can give up our ‘stories’ for very long. In fact, the move to index investing has been a kind of ‘anti-story’, a hopeless story of the Lost Decade, or at least the Great Recession.  But soon enough, we will turn our ears to more hopeful and persuasive stories about how this-or-that stock, this-or-that investment strategy, or this-or-that asset class will help us accumulate wealth faster. We will turn to ideas – and people – that promise to be above the average.

Which brings us to the second big point from the Black Swan. Those in the business of analyzing data have been too influenced by the tyranny of Gauss’ bell curve. Given a set of data, our first intinct is to calculate the average. Taleb thinks we should worry about the average a lot less, and pay more attention to the outliers. And yet all we talk about is averages, and average is, of course, what’s at the heart of index investing. The average mutual fund underperforms the average of the market – the index. So safer to simply settle for the average index. True enough. But do high school basketball games get televised? No, NBA games get televised. We pay attention to the best of the best, not the average.  Yes, it’s exceedingly difficult to spot the best and catch them early. But it’s in our nature to search for them, whether or not we do it well. It’s not in our nature to settle for average. And so stock pickers will continue to pick stocks. And some of them will become advisors, brokers and portfolio managers. And some of these will begin, once again, to tell very compelling stories about how to invest above average.