Obfuscation, Learning, and the Evolution of Investor Sophistication Accessed Terms of Use Detailed Terms Obfuscation, Learning, and the Evolution of Investor Sophistication *

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. We would like to thank Nittai Bergman, Tony Bernardo, Michael Brennan, Bhagwan Chowdry, Doug Diamond, Darrell Duffie, Paolo Fulghieri, Xavier Gabaix, Rick Green, Mark Grinblatt, Joel Hasbrouck, Leonid Kogan, David Laibson, Francis Longstaff, Holger Mueller, Lubos Pastor, Dick Roll, Andrei Shleifer, Eduardo Schwartz, Avanihdar Subrahmanyam, Sheridan Titman, Pietro Veronesi, Pierre-Olivier Weill, Bilge Yilmaz, and seminar participants at the University of Chicago, NYU, MIT, Columbia University, University of Washington, Northwestern University, University of Southern California, Yale University, UCLA, the Texas Finance Festival, and the annual Netspar Pension Management Conference at Tilburg University. Anderson School of Management, University of California, Los Angeles, 110 Westwood Plaza Suite C519, Los Angeles, CA 90095, [email protected], (310) 825-7246. MIT Sloan School of Management, 50 Memorial Drive E52-446, Cambridge, MA 02142-1347, [email protected], (617) 253-7218.