# kaal:claim:1428387-022

**Claim.** Moral hazard is worsened when the financial products traded are so complex that the agents, mostly on the buy side, do not entirely understand them and trade for the principal on the basis of incomplete and asymmetric information.

**Type.** mechanism  **Support.** argued

**Holds when.**

- where instruments are highly complex
- buy side agents in particular

**Source quote.**

> The moral hazard problem is further exacerbated when the financial products involved in many of these transactions are so highly complex that the agents, mostly on the buy side, do not entirely understand them and trade for the principal based on incomplete and asymmetric information.

**From.** Kaal, *Hedge Fund Valuation Retailization, Regulation, and Investor Suitability* (2009), V.A.1 Hierarchies in Financial Institutions, page 41

**Cite as.** Kaal, Hedge Fund Valuation Retailization, Regulation, and Investor Suitability (2009). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1428387

**Verify.** sha256 of source PDF `6aa3a280dc6750723be2389f3af2aabf3a16c4ce20e49fcdaddd7f2ea95a67aa` at https://raw.githubusercontent.com/wulfkaal/Academic-Papers/main/papers/pdf/Kaal%20-%202009%20-%20Hedge%20Fund%20Valuation%20Retailization%2C%20Regulation%2C%20and%20Investor%20Suitability.pdf

**Failure mode.** agent-incomprehension  (family: agency-cost-and-managerial-opportunism)

**Topics.** risk-and-incentives, disclosure

**Keywords.** moral-hazard, information-asymmetry, complex-instruments, bounded-rationality

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