Active and Passive Investing: Understanding Samuelson’s Dictum (2024)

Gârleanu , N. (2022). Active and Passive Investing: Understanding Samuelson’s Dictum. The Review of Asset Pricing Studies, 12(2), 389-446. https://doi.org/10.1093/rapstu/raab020

Gârleanu , Nicolae ; Pedersen, Lasse Heje. / Active and Passive Investing : Understanding Samuelson’s Dictum. In: The Review of Asset Pricing Studies. 2022 ; Vol. 12, No. 2. pp. 389-446.

@article{d30e8dc10d994a239e5616398744ea37,

title = "Active and Passive Investing: Understanding Samuelson{\textquoteright}s Dictum",

abstract = "We model how investors allocate between asset managers, managers choose portfolios of multiple securities, fees are set, and security prices are determined. Investors are indifferent between higher-cost informed managers and lower-cost uninformed managers, interpreted as passive managers as their portfolio is linked to the {"} expected market portfolio.{"} We make precise Samuelson's dictum by showing that active investors reduce micro-inefficiencies more than they do macro-inefficiencies. In fact, all inefficiency arises from systematic factors when the number of assets is large. Further, we show how the costs of active and passive investing affect macro- and micro-efficiency, fees, and assets managed by active and passive managers. Our findings help explain the rise of delegated asset management and the resultant changes in financial markets.",

author = "Nicolae G{\^a}rleanu and Pedersen, {Lasse Heje}",

year = "2022",

month = jun,

doi = "10.1093/rapstu/raab020",

language = "English",

volume = "12",

pages = "389--446",

journal = "The Review of Asset Pricing Studies",

issn = "2045-9920",

publisher = "Oxford University Press",

number = "2",

}

Gârleanu , N 2022, 'Active and Passive Investing: Understanding Samuelson’s Dictum', The Review of Asset Pricing Studies, vol. 12, no. 2, pp. 389-446. https://doi.org/10.1093/rapstu/raab020

Active and Passive Investing: Understanding Samuelson’s Dictum. / Gârleanu , Nicolae; Pedersen, Lasse Heje.
In: The Review of Asset Pricing Studies, Vol. 12, No. 2, 06.2022, p. 389-446.

Research output: Contribution to journal › Journal article › Research › peer-review

TY - JOUR

T1 - Active and Passive Investing

T2 - Understanding Samuelson’s Dictum

AU - Gârleanu , Nicolae

AU - Pedersen, Lasse Heje

PY - 2022/6

Y1 - 2022/6

N2 - We model how investors allocate between asset managers, managers choose portfolios of multiple securities, fees are set, and security prices are determined. Investors are indifferent between higher-cost informed managers and lower-cost uninformed managers, interpreted as passive managers as their portfolio is linked to the " expected market portfolio." We make precise Samuelson's dictum by showing that active investors reduce micro-inefficiencies more than they do macro-inefficiencies. In fact, all inefficiency arises from systematic factors when the number of assets is large. Further, we show how the costs of active and passive investing affect macro- and micro-efficiency, fees, and assets managed by active and passive managers. Our findings help explain the rise of delegated asset management and the resultant changes in financial markets.

AB - We model how investors allocate between asset managers, managers choose portfolios of multiple securities, fees are set, and security prices are determined. Investors are indifferent between higher-cost informed managers and lower-cost uninformed managers, interpreted as passive managers as their portfolio is linked to the " expected market portfolio." We make precise Samuelson's dictum by showing that active investors reduce micro-inefficiencies more than they do macro-inefficiencies. In fact, all inefficiency arises from systematic factors when the number of assets is large. Further, we show how the costs of active and passive investing affect macro- and micro-efficiency, fees, and assets managed by active and passive managers. Our findings help explain the rise of delegated asset management and the resultant changes in financial markets.

U2 - 10.1093/rapstu/raab020

DO - 10.1093/rapstu/raab020

M3 - Journal article

SN - 2045-9920

VL - 12

SP - 389

EP - 446

JO - The Review of Asset Pricing Studies

JF - The Review of Asset Pricing Studies

IS - 2

ER -

Gârleanu N, Pedersen LH. Active and Passive Investing: Understanding Samuelson’s Dictum. The Review of Asset Pricing Studies. 2022 Jun;12(2):389-446. doi: 10.1093/rapstu/raab020