In 136 studies that pitted a fixed formula against expert judgement, the expert came out clearly ahead in only 8. That is the finding of a 2000 meta-analysis led by William Grove of the University of Minnesota. A meta-analysis pools the results of many earlier studies.
Investing runs the same contest. Systematic investing follows written rules. Discretionary investing leaves each decision to a person's judgement. Here is what published research says about which works better. We add one test of our own on a fund that tracks 500 large US companies.
Systematic vs discretionary investing: which works better? Systematic investing follows written rules for what to buy, how much and when to sell. Discretionary investing leaves each decision to a person's judgement. The published evidence leans towards rules. They matched or beat experts in most prediction studies, while systematic hedge funds did at least as well once risk was counted.
In 136 studies of health and behaviour predictions, a formula was clearly more accurate than experts in 63 and about as accurate in 65. Experts were clearly more accurate in 8.
Hedge funds are private funds that can also bet on falling prices. Across more than 9,000 of them, from 1996 to 2014, systematic funds did at least as well as discretionary ones once risk was counted. Their lead was clearest among macro funds, which trade bonds, currencies, commodities and share indices.
From June 2016 to September 2026, $100 in a fund tracking the S&P 500 index of large US companies grew to $435. Missing its 10 best days would have left $230. Eight of those days came within five trading days of one of the 10 worst, so stepping out on judgement is hard to time.
The difference between systematic and discretionary investing
A systematic investor writes the rules down before the money goes in. The rules say what to buy, how much and when to sell. The same inputs always give the same decision. We explain the parts of a system in What Is Systematic Investing? and build one from three rules in What Is Rules-Based Investing?
A discretionary investor judges each case on its merits. They may read the same data, but the final call is theirs.
Evidence 1: rules vs experts in 136 prediction studies
Source: Grove et al. (2000), Psychological Assessment; YX Insights
The Grove meta-analysis, published in Psychological Assessment in 2000, gathered 136 studies of predictions about human health and behaviour. Each study compared trained experts with a mechanical method, meaning a formula or a statistical model.
The formula was clearly more accurate in 63 studies. The two were about as accurate in 65. Experts were clearly more accurate in 8. The authors also found experts did relatively worse when they had interviewed the person they were judging.
The question goes back to psychologist Paul Meehl's 1954 book, Clinical versus Statistical Prediction. The studies cover health and behaviour. They do not test investing.
Evidence 2: systematic vs discretionary hedge funds
A hedge fund is a private investment fund that can bet on prices falling as well as rising. In 2017, Campbell Harvey of Duke University and three co-authors compared systematic and discretionary hedge funds. Two of the co-authors worked at Man Group, which runs systematic funds. Their paper, published in The Journal of Portfolio Management, covered more than 9,000 funds from June 1996 to December 2014. Returns are after fees. They are measured above the interest earned on cash.
The funds were split into two types. Macro funds trade bonds, currencies, commodities and share indices. Equity funds trade company shares.
Source: Harvey, Rattray, Sinclair and Van Hemert (2017), The Journal of Portfolio Management; YX Insights
Systematic macro funds returned 5.0% a year above cash, against 2.9% for discretionary macro funds. In equities it was the other way round: 4.1% for discretionary funds against 2.9% for systematic ones.
A risk-adjusted return takes out the part of a fund's return that came from common sources, such as owning the stock market or following trends. On that measure, systematic macro funds earned 4.9% a year, against 1.6% for discretionary macro. Equity funds were level, at 1.1% for systematic and 1.2% for discretionary.
The authors also divided each risk-adjusted return by how much it swung. This is called the appraisal ratio. Higher is better. Systematic funds scored higher in both groups. In macro it was 0.44 against 0.31. In equities it was 0.35 against 0.25. The authors called the macro gap smaller on this measure and the equity gap slight. They concluded that the two styles "have historically had similar performance after adjusting for volatility and factor exposures." On their own numbers, systematic funds did at least as well.
In 2000, Brad Barber and Terrance Odean of the University of California, Davis, studied 66,465 US households with share accounts at a large discount share-dealing firm, from 1991 to 1996. They sorted the households into five equal groups by how much they traded. Their paper appeared in The Journal of Finance.
Source: Barber and Odean (2000), The Journal of Finance; YX Insights
After trading costs, the average household earned 16.4% a year. The fifth that traded most earned 11.4%, while the fifth that traded least earned 18.5%. The US stock market returned 17.9%.
Before costs, the average household earned 18.7%, which beat the market. Trading costs turned that lead into a shortfall. So the damage came from trading too much. The average household replaced 75% of its portfolio each year, a measure called turnover. The authors point to overconfidence as the reason for so much trading.
Our test: missing SPY's best days
A judgement call to step out of the market has to time two things. It must be out for the bad days and back in for the good ones. We tested how close together those days fall, using SPY (the S&P 500 exchange-traded fund, or ETF).
Source: YX Insights price data
From 20 June 2016 to 24 September 2026, with dividends counted, $100 held every day grew to $435. That is 15.4% a year. Missing the 10 best days would have left $230, or 8.4% a year. That assumes nothing was earned on those days. Missing both the 10 best and the 10 worst days would have left $445, slightly more than simply holding.
The catch is timing. Eight of the 10 best days came within five trading days of one of the 10 worst. For example, SPY fell 9.6% on 12 March 2020, then rose 8.5% the next day. Seven of the 10 best days fell in 2020.
A trend rule holds the market while prices rise and steps out when they fall. It can miss the same rebounds, as our test in Can Systematic Investing Beat the S&P 500? shows. The difference is that a rule's exits can be tested on this history in advance. A judgement call to step out cannot.
Where rules and judgement each go wrong
Rules fail in their own ways:
Fitting the past. A rule tuned to old data can describe history and miss the future. We explain this in What Is Backtesting?
Fixed inputs. A formula only reads the inputs it was given. It cannot weigh a fact outside them.
Judgement fails in others:
Vivid impressions. Experts did relatively worse when their inputs included an interview.
Overtrading. In Barber and Odean's data, the households that traded most earned the least.
How to choose between systematic and discretionary investing
A few checks help when weighing a method of either kind:
Is the process written down? A rule can be tested. A judgement call made in the moment cannot.
Is the record after costs? In the household data, costs turned a lead over the market into a shortfall.
How long is the record? One good year is a small sample. The hedge fund study covered more than 18 years.
Does it trade less? Turnover costs money, whoever makes the decisions.
So which works better? In prediction studies, rules usually matched or beat experts. Among hedge funds, systematic funds did at least as well as discretionary ones once risk was counted. For individual investors, the clearest loss came from trading too much.
Learn more with YX Insights
This explainer is part of the YX Insights Academy. Each one takes a single idea and checks it against real data.
The same approach runs through everything else we publish:
Systematic Portfolio: ready-made portfolios for Macro & Megacaps and for Commodities. We publish the holdings and every change.
Multi-model Signals: a daily long-or-flat call on every name we cover. Each call shows how strongly our four models agree.
Research: company deep dives, macro commentary and essays on how we test.
Good places to start on the website:
Academy: more explainers like this one.
Start here: get our free weekly letter by email.
Macro & Megacaps Systematic Portfolio and Commodities: the two portfolios in detail.
Track record: live results since 3 August 2026, plus the ten-year backtest.
Upgrade: get the Systematic Portfolio, Multi-model Signals and research in full.
DISCLAIMER: This article is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.