NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Obfuscation, Learning, and the Evolution of Investor Sophistication

Bruce Ian Carlin, Gustavo Manso

NBER Working Paper No. 14954
Issued in May 2009
NBER Program(s):   CF

Investor sophistication has lagged behind the growing complexity of retail financial markets. To explore this, we develop a dynamic model to study the interaction between obfuscation and investor sophistication. Taking into account different learning mechanisms within the investor population, we characterize the optimal timing of obfuscation for financial institutions who offer retail products. Obfuscation decreases with competition among firms, but increases with higher investor participation in the market. We show that educational initiatives that are directed to facilitate learning by investors may induce producers to increase wasteful obfuscation, further disorienting investors and decreasing overall welfare.

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Published: Obfuscation, Learning, and the Evolution of Investor Sophistication Bruce Ian Carlin Gustavo Manso Rev. Financ. Stud. (2011) 24 (3): 754-785. doi: 10.1093/rfs/hhq070 First published online: September 2, 2010

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