Abstract
Can financial markets learn an analyst's ability when fundamental asset values are unobserved, and learning about ability relies on aggregating the private information held by investors? We show that as a financial analyst becomes reputable, the market can get trapped: Investors optimally choose to ignore their private information, and blindly follow the analyst's recommendations. As time goes by and recommendations accumulate, arbitrage based on the inferred ability of the analyst may become profitable again. The market can thus be trapped at times and yet be able, in the long run, to sort the pundits from the quacks. However, this process is impaired as new assets become available: In that case, the market might be trapped indefinitely..
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