Coordinated Inattention and Disclosure Complexity

Abstract

We examine a beauty contest game with an option to analyze an additional dis-closure. We analytically prove that in some scenarios, coordination incentives cause sophisticated players who can comprehend disclosures to choose not to analyze them to match unsophisticated players’ actions, a phenomenon we call “coordinated inattention.” Laboratory experiments provide support for the coordinated inattention mechanism: Coordination incentives reduce sophisticated subjects’ propensity to analyze disclosures, especially when they believe others are unlikely to comprehend them. We further find that psychological biases help reduce coordinated inattention. Subjects are overconfident, sophisticated subjects overestimate others’ ability to comprehend dis-closures, and both biases are associated with a higher tendency to analyze disclosures. Our analysis suggests that unsophisticated decision makers’ inability to comprehend complex disclosures has a negative spillover effect by reducing sophisticated decision makers’ attention to disclosures. Our results highlight the importance of the SEC’s and FASB’s recent efforts to make disclosures easier to comprehend.

Keywords: information acquisition, beauty contest game, complexity, investor sophistication, false consensus effect, overconfidence.