||The purpose of this dissertation is to address a problem facing many individual investors in financial markets: is it better to invest into actively managed open-end mutual funds or is a small investor better off by tracking a market index through a passive mutual fund? Since the key to the answer lies in the behavior and determinants of asset prices a substantial part of the dissertation is dedicated to a thorough discussion of the most important theoretical aspects of the asset price process as well as its empirical properties. After presenting the Efficient Market Hypothesis we proceed with the more recent developments in modern finance and discuss the contributions of behavioral finance and the artificial financial markets literature to the understanding of the behavior of asset prices. We then turn to the empirics and survey the literature on mutual fund performance. We believe that the empirical evidence favors the passive mutual funds as the optimal choice for small individual investors.