Working Paper: NBER ID: w14954
Authors: Bruce Ian Carlin; Gustavo Manso
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.
Keywords: Investor sophistication; Obfuscation; Financial markets; Consumer learning; Educational initiatives
JEL Codes: D14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| competition among firms (L13) | obfuscation (Y50) |
| higher investor participation (G24) | obfuscation (Y50) |
| educational initiatives (I29) | obfuscation (Y50) |
| increased obfuscation (Y50) | overall welfare (I31) |
| extra rents gained from unsophisticated consumers (D43) | optimal timing of obfuscation (C41) |
| higher rents (R21) | frequency of obfuscation (Y50) |
| increased competition (L13) | obfuscation frequency (Y50) |