The rational optimum with no transaction costs[1] would be finding the best investor, and letting him make all the decisions. Everybody else should invest on the index.

Put transaction costs there, and you get an adversarial system. Now the top investors will try to convince the others of their own incompetence. Didn't do the math, but the outcome is probably bad.

Now, fill the market with real humans and irrationality will make sure enough incompetent investors will be active to let a big enough amount of competent ones make a win. Stable again.

I'm really unconcerned about index funds.

[1] A spherical cow in vacuum.