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Obfuscation, Learning, and the Evolution of Investor Sophistication

31 Pages Posted: 6 Feb 2009 Last revised: 23 Dec 2009

Bruce I. Carlin

University of California, Los Angeles (UCLA) - Anderson School of Management

Gustavo Manso

University of California, Berkeley - Haas School of Business

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Date Written: January 12, 2009

Abstract

We develop a dynamic model to study the interaction between obfuscation and investor sophistication in retail financial markets. Taking into account different learning mechanisms within the investor population, we characterize the optimal timing of obfuscation for a profit-maximizing monopolist. 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. Obfuscation decreases with competition among firms, but increases with higher investor participation in the market.

Keywords: Obfuscation, Investment, Sophistication

JEL Classification: D11, G28, D18

Suggested Citation

Carlin, Bruce I. and Manso, Gustavo, Obfuscation, Learning, and the Evolution of Investor Sophistication (January 12, 2009). Swiss Finance Institute Research Paper No. 09-48. Available at SSRN: https://ssrn.com/abstract=1338187 or http://dx.doi.org/10.2139/ssrn.1338187

Bruce Carlin (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Gustavo Manso

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

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