Obfuscation, Learning, and the Evolution of Investor Sophistication
Author(s)Carlin, Bruce Ian; Manso, Gustavo
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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 sophistica- tion in mutual fund markets. Taking into account different learning mechanisms within the investor population, we characterize the op- timal timing of obfuscation for financial institutions who offer retail products. We show that educational initiatives that are directed to fa- cilitate learning by investors may induce providers to increase wasteful obfuscation, further disorienting investors and decreasing overall wel- fare. Obfuscation decreases with competition among firms, since the information rents from obfuscation dissipate as each institution attracts a smaller market share.
DepartmentSloan School of Management
Review of Financial Studies
Oxford University Press for the Society for Financial Studies
Carlin, Bruce Ian, and Gustavo Manso. “Obfuscation, Learning, and the Evolution of Investor Sophistication.” Review of Financial Studies 24.3 (2011) : 754 -785.
Author's final manuscript