Active and Passive Investing: Understanding Samuelson’s Dictum

Nicolae Gârleanu *, Lasse Heje Pedersen

*Corresponding author for this work

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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.
Original languageEnglish
JournalThe Review of Asset Pricing Studies
Issue number2
Pages (from-to)389-446
Number of pages58
Publication statusPublished - Jun 2022

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