Attention to Extreme Returns

Abstract

It has been shown that individual investors are more likely to buy rather than sell stocks that catch their attention. This can lead to suboptimal choices when attention-attracting qualities of a stock may indirectly detract from its utility. This paper tests the causal effect of extreme stock returns on investors' purchase behavior at the individual level by means of a controlled laboratory experiment. We find a strong asymmetry, as shares of stocks with recent extreme negative returns are more likely to be purchased than shares of stocks with recent less extreme negative returns. Yet, comparable patterns are not observed for stocks with positive returns. We further track subjects' eye movements and show that individual visual attention mediates our treatment effect. Interestingly, the results show that attention-driven purchase behavior occurs even in situations in which it reduces subjects’ expected return.

Keywords: Attention, Investor Behavior, Stock Market, Experiments

JEL Classification: D12, G11, G41