Individual Traders and the Allocation of Scarce Attention
41 Pages Posted: 7 Mar 2014 Last revised: 31 Dec 2015
Date Written: December 29, 2015
I consider a rational expectations model in which individual investors become informed by allocating limited attention to stocks. A single informed individual provides no measurable effects. However, individuals' equilibrium attention allocations are identical. Consequently, there exists an informed herd that crowds out institutions in some stocks. Recent empirical work indicates that some individual traders are informed, their actions are measurable, and their trades appear coordinated. My model explains the data and provides new cross sectional and time series predictions regarding investor clienteles and attentiveness. The model challenges the standard assumption that the actions of informed individuals are subsumed by institutions.
Keywords: Investor Attention, Rational Inattention, Individual Investors
JEL Classification: G19, G10, G14
Suggested Citation: Suggested Citation