TY  - JOUR
AU  - Peng,Lin
AU  - Xiong,Wei
TI  - Investor Attention: Overconfidence and Category Learning
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11400
PY  - 2005
Y2  - June 2005
UR  - http://www.nber.org/papers/w11400
L1  - http://www.nber.org/papers/w11400.pdf
N1  - Author contact info:
Lin Peng
Department of Economics and Finance
Baruch College, City University of New York
One Bernard Baruch Way, 10-225
New York, NY 10010
Tel: 646/312-3491
Fax: 646/312-3451
E-Mail: lin_peng@baruch.cuny.edu

Wei Xiong
Princeton University
Department of Economics
Bendheim Center for Finance
Princeton, NJ  08450
Tel: 609/258-0282
Fax: 609/258-0771
E-Mail: wxiong@princeton.edu
AB  - 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.
ER  -