Stock-Picking? Oh, That is So 1980

A new working paper argues that stock-picking is on the long-term decline to much lower levels:

We find that though there is more stock picking in emerging markets than in developed countries, it is declining everywhere. In the United States, for example, stock picking has secularly declined from a high of 60% in the 1960s to a low of 24% in the 2000s. Finally, as markets cannot be efficient if everyone believes that they are efficient and, therefore, do no stock picking – the Grossman and Stiglitz (1980) paradox – we ask what is the long-run steady state fraction of stock pickers? We develop a simple theoretical model, and calibrate this model to the United States economy to conclude that stock picking will eventually settle at 11% of trading volume in the United States.

While I think that the authors are optimists and there will always be more stock-pickers out there than is rational, it is an interesting conclusion, one with important implications for discount brokerages and the like.


  1. from what i understand, more than half of the trading done now is machine trading, so you can assume they aren’t picking. how long until 75% of trading is machine trading?

  2. Michael Robinson says:

    I’m confused. From my skim through the paper, it seems the authors come to the 11% figure by positing an asymptotic progression to equilibrium of the market price for risk, but then show a historical data series that shows neither a clear asymptotic progression, nor a clear correlation between ideosyncratic risk and stock picking (Figure 4).
    Unless I’m missing something, it seems to me they actually conclude that stock picking will eventually settle at 11%, plus or minus an unspecified large number.
    I’m also deeply skeptical that their proxy measure of stock picking shows a significant, steady decline from 40% in 1995 to 20% in 2001. That should be a big red flag that something may not be quite right with their model.