Coordinated Ignorance and Disclosure Complexity

We consider a two-stage game with an option to analyze disclosures in the first stage, and a coordination game in the second stage. Decision makers are assumed to be heterogeneous in their ability to comprehend disclosures—sophisticated players are likely to comprehend disclosures, while unsophisticated players are not. Our model predicts that coordination incentives prevent sophisticated decision makers from analyzing disclosures, especially when disclosures are complex, a phenomenon we call “coordinated ignorance.” We conduct laboratory experiments and show that coordination incentives reduce people’s propensity to analyze disclosures, especially when they believe that others are unlikely to comprehend them. We also find that subjects are overconfident about their own ability and that sophisticated subjects overestimate others’ ability to comprehend disclosures, consistent with a false consensus effect. We find that both overconfidence and a false consensus increase players’ tendency to analyze disclosures, and thus reduce coordinated ignorance. Overall, our analysis shows that the existence of unsophisticated decision makers can impose negative externalities on others’ decisions to analyze disclosures, and it highlights the importance of the SEC’s recent efforts to make disclosures easier to comprehend, especially in settings with coordination incentives