On the Size of the Active Management Industry - LUBOS PASTOR, University of Chicago, presents his paper (coauthored with Robert F. Stambaugh). We argue that the popularity of active management is not puzzling despite the industry�s poor track record. Our model features decreasing returns to scale: as the industry's size increases, every manager's ability to outperform passive benchmarks declines. We find that the active management industry can remain large even after significantly negative underperformance. Given the observed performance of active mutual funds, investors proportional allocation to active management should have shrunk only modestly since 1962. We also find investors face endogeneity that limits their learning about returns to scale and allows prolonged departures of the industry's size from its optimal level. The 2nd HEC Finance and Statistics Conference was held in Paris on October 8, 2010. It was organized by Laurent Calvet and Veronika Czellar, HEC Paris. The conference program is available at http://www.hec.fr/financeandstatistics2010.