Obfuscation, Learning, and the Evolution of Investor Sophistication
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.
We would like to thank Nittai Bergman, Tony Bernardo, Michael Brennan, Bhagwan Chowdry, Doug Diamond, Darrell Duffie, Paolo Fulghieri, Xavier Gabaix, Rick Green, Mark Grinblatt, Joel Hasbrouck, Leonid Kogan, David Laibson, Francis Longstaff, Holger Mueller, Lubos Pastor, Dick Roll, Andrei Shleifer, Eduardo Schwartz, Avanihdar Subrahmanyam, Sheridan Titman, Pietro Veronesi, Pierre-OlivierWeill, Bilge Yilmaz, and seminar participants at the University of Chicago, NYU, MIT, University ofWashington, UCLA, the Texas Finance Festival, and the annual Netspar Pension Management Conference at Tilburg University. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Bruce Ian Carlin & Gustavo Manso, 2011. "Obfuscation, Learning, and the Evolution of Investor Sophistication," Review of Financial Studies, vol 24(3), pages 754-785.