Investor Attention: Overconfidence and Category Learning / Lin Peng, Wei Xiong.

Format:

Book

Author/Creator:

Peng, Lin.

Contributor:

National Bureau of Economic Research.

Xiong, Wei.

Series:

Working Paper Series (National Bureau of Economic Research) no. w11400.

NBER working paper series no. w11400

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Investor Attention

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2005.

Summary:

Motivated by psychological evidence that attention is a scarce cognitive resource, we model investors' attention allocation in learning and study the effects of this on asset-price dynamics. We show that limited investor attention leads to ``category-learning" behavior, i.e., investors tend to process more market and sector-wide information than firm-specific information. This endogenous structure of information, when combined with investor overconfidence, generates important features observed in return comovement that are otherwise difficult to explain with standard rational expectations models. Our model also demonstrates new cross-sectional implications for return predictability.

Notes:

Print version record

June 2005.