NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Investor Attention: Overconfidence and Category Learning

Lin Peng, Wei Xiong

NBER Working Paper No. 11400
Issued in June 2005
NBER Program(s):   AP

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.

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Document Object Identifier (DOI): 10.3386/w11400

Published: Peng, Lin and Wei Xiong. "Investor Attention, Overconfidence And Category Learning," Journal of Financial Economics, 2006, v80(3,Jun), 563-602.

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