The Myth of the Monkey

Abstract

This article considers whether asset managers provide economic benefit even though their excess returns, on average, at best equal zero. A simple thought experiment demonstrates that they do. Although researchers have studied efficiency via competition across firms, a more general definition of market efficiency is where the industry total product reaches a maximum. Market efficiency has little to do with managers’ average excess returns—that is, whether managers beat an index. This is easy to see when asset management, and financing activities in general, are modeled as a type of production function and exist as a part of the real economy.