An Austrian Critique of Passive Investing

Abstract

This article reviews numerous arguments Austrian scholars have made against the efficient market hypothesis and asserts that these arguments are sufficient grounds for dismissal of many of the theoretical justifications which have been advanced in favor of passive investing, and in favor of the traditional value-weighted index fund in particular. In the absence of theoretical justification, empirical test results are the primary evidence to substantiate passive investing’s claim to superiority relative to alternative investment strategies—results which, this article contends, are insufficient grounds for acceptance of the claim. Finally, it is argued that the much-emphasized contradistinction between active and passive investing is lacking in substance. The passive portfolio’s construction is the product of subjective human judgment just as the actively managed portfolio is; passive investing merely involves a different kind of judgment.