The Impact of News in a Reinforcement-driven Information Evaluation
47 Pages Posted: 31 Oct 2018 Last revised: 28 Jan 2021
Date Written: January 27, 2021
In a world of increasingly extensive information, rational investors can make better decisions. However, investors who are paying special attention to reinforcing information are also more likely to observe preferred signals close to their prior estimate. A focus on these signals reduces belief adaptation. Thus, under the empirically well-documented reinforcement theory, additional information can decrease perception correctness. It explains why wider information accessibility has not increased price efficiency significantly. Managers have an incentive to provide more, diffuse (fewer, precise) signals in case of negative (positive) information. This results in post-earnings-announcement drift and dispersion anomaly. An extension covers the impact of the signal distribution shape.
Keywords: Reinforcement-driven learning, selective exposure, signal processing, behavioral finance, post-earnings-announcement drift, financial anomalies
JEL Classification: G02, G12
Suggested Citation: Suggested Citation