Investor Attention: Overconfidence and Category Learning
- Topics:
- Investment and Capital Markets
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Overview: Motivated by psychological evidence that attention is a scarce cognitive resource, this paper models investors' attention allocation in learning and study the effects of this on asset-price dynamics. The paper shows 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.
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Format: PDF | Size: 393KB | Date: Jun 2005 | Pages: 54
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