Speaker: John Kim, Princeton University
ABSTRACT
The popularity of active asset management has been puzzling. We derive a model of active portfolio management that explains this puzzle, with quantitative application in mind. The key ingredients of the model are product differentiation by managers and irrational optimism of investors to new fund types. Together, they generate slow learning on the part of investors and managerial skill overpricing. We then offer some empirical evidence in support of our mechanism, and discuss the theory's policy implications.