Obfuscation, Learning, and the Evolution of Investor Sophistication

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