Is That a $100 Bill on the Sidewalk?

ABSTRACT

I analyze a setting in which investors sequentially encounter a potentially profitable investment opportunity, and decide both whether to investigate its quality and whether to exploit the opportunity. Once exploited, the opportunity is unavailable to future investors. The key friction is that an investor observes only whether the opportunity remains available, but is ignorant about the number of investors who have already investigated the opportunity. The probability that the opportunity is exploited decreases in the number of investors. Safe opportunities are exploited more often than risky ones, even controlling for average profitability. Higher exploitation probabilities are generally associated with lower observed Sharpe ratios.