Obfuscation, Learning, and the Evolution of Investor Sophistication

32 Pages Posted: 19 May 2009

See all articles by Bruce I. Carlin

Bruce I. Carlin

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

Gustavo Manso

University of California, Berkeley - Haas School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 2009

Abstract

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.

Suggested Citation

Carlin, Bruce I. and Manso, Gustavo, Obfuscation, Learning, and the Evolution of Investor Sophistication (May 2009). NBER Working Paper No. w14954. Available at SSRN: https://ssrn.com/abstract=1405962

Bruce I. 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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