Excerpted from Common Sense on Mutual Funds by John C. Bogle, -pages 157-158
As Peter Bernstein tells the story in his marvelous book, Against the Gods, Blaise Pascal, the father of probability theory, cast the question of the existence of God as a game of chance: "A coin is tossed. Which way would you bet: on heads (God is) or tails (God is not)?"
Paraphrasing Pascal, consider the chances of being on the losing side of the bet. If you bet God is, you will live a holy life and give up a few enjoyable temptations, but that's all you lose. If you bet God is not and you are wrong, but you give in to all temptations, your evil life will cause you to be forever damned. Consequences must outweigh probabilities.
Turning to the stock market, Bernstein continues, if you believe it is efficient (and you are right), the best strategy is to buy an index fund. If you believe it is efficient (and you are wrong), you will earn the market's return, but a few actively managed funds will beat you. But if you bet that the market is not efficient and you are wrong, the consequences of underperforming with an actively managed fund could be very painful. The risk, in short, is much greater if you bet on inefficiency rather than on efficiency.
