The paper by Jonathan B. Berk and Richard C. Green explores the relationship between mutual fund flows and performance in rational markets. They develop a simple rational model of active portfolio management to evaluate the observed relationship between returns and fund flows. The model suggests that investments with active managers do not outperform passive benchmarks due to the competitive market for capital provision and decreasing returns to scale in active portfolio management. Consequently, past performance cannot predict future returns or infer the average skill level of active managers. The lack of persistence in active manager returns does not imply that differential ability across managers is nonexistent or unrewarded, but rather that capital flows to investments where it is most productive. The model also shows that a strong relationship between past performance and fund flows exists, which ensures that no predictability in performance is possible. Calibrating the model to observed fund flows and survival rates, they find that 80% of active managers have enough skill to make back their fees. The paper concludes by discussing the implications of these findings for the rationality of investors and the efficiency of financial markets.The paper by Jonathan B. Berk and Richard C. Green explores the relationship between mutual fund flows and performance in rational markets. They develop a simple rational model of active portfolio management to evaluate the observed relationship between returns and fund flows. The model suggests that investments with active managers do not outperform passive benchmarks due to the competitive market for capital provision and decreasing returns to scale in active portfolio management. Consequently, past performance cannot predict future returns or infer the average skill level of active managers. The lack of persistence in active manager returns does not imply that differential ability across managers is nonexistent or unrewarded, but rather that capital flows to investments where it is most productive. The model also shows that a strong relationship between past performance and fund flows exists, which ensures that no predictability in performance is possible. Calibrating the model to observed fund flows and survival rates, they find that 80% of active managers have enough skill to make back their fees. The paper concludes by discussing the implications of these findings for the rationality of investors and the efficiency of financial markets.