Obfuscation, Learning, and the Evolution of Investor Sophistication

Bruce Carlin; Gustavo Manso

doi:10.1093/rfs/hhq070

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Obfuscation, Learning, and the Evolution of Investor Sophistication

Bruce Carlin¹; Gustavo Manso²

¹ Anderson School of Management, University of California · ² MIT Sloan School of Management

Review of Financial Studies 2011

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 in mutual fund markets. Taking into account different learning mechanisms within the investor population, we characterize the optimal timing of obfuscation for financial institutions who offer retail products. We show that educational initiatives that are directed to facilitate learning by investors may induce providers to increase wasteful obfuscation, further disorienting investors and decreasing overall welfare. Obfuscation decreases with competition among firms, since the information rents from obfuscation dissipate as each institution attracts a smaller market share.

DOI: 10.1093/rfs/hhq070
Volume: 24 (3)
Pages: 754-785
Language: en
Export: BibTeX
Sources: openalex crossref