Why do investors entrust active mutual fund managers with large sums of money while receiving negative excess returns … on average? Our explanation is that investors have a coarser information set than fund managers which leads them to … systematically misinterpret managers' skill. When investors are unable to correctly quantify risk because they have no knowledge of …

-skill managers outperform their low-skill peers in the following month in terms of raw returns and alphas. This outperformance is …