The average investor knows that she can't beat the stock index but that does not effect investment behavior. This graph shows assets appreciated between 1992 and 2011 and how the average investor has made out. The average investor underperforms the market by acting irrationally. The basic mistakes are attempts to pick stocks that will outperform the market and to time the market. They invest during market peaks and they sell during market lows.
This result also says something about the fundamental assumption of economic theory. That is, that we all make rational decisions, and that the sum of our decisions is the best possible result that we can hope for in any market. Asset prices have increased substantially but the average investor has not beaten the inflation rate. The average investor is irrational to a fault.
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