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Predictable Behavior, Profits, and Attention

41 Pages Posted: 22 Mar 2005  

Mark S. Seasholes

Hong Kong University of Science & Technology (HKUST)

Guojun Wu

University of Houston; China Academy of Financial Research (CAFR)

Date Written: January 5, 2005


This paper studies the set of links between a behavioral bias, transitory price movements, and the rational response to the bias. We show that attention-grabbing events lead active individual investors to consider and ultimately buy stocks they have not previously owned. Not all attention-grabbing events lead to predictable behavior. Only those events that lower search costs (i.e., events that narrow the set of stocks under consideration) lead to attention-based buying. We show that attention-based buying is linked to transitory price shocks with a magnitude of 1.29% and duration of 10 days. We also hypothesize and show that behavioral biases do not exist in a vacuum - especially biases that are linked to asset price movements. Rational arbitrageurs (smart traders) profit in response to attention-based buying. The smart traders earn one day profits of 0.76% net of transaction costs. We are able to decompose the smart traders' profits into a portion related to liquidity provision (58%) and a portion related to taking advantage of attention-based buying (42%). Our data and profit decomposition allow us to calculate the substantial economic cost of a behavioral bias borne by individual investors.

Keywords: Attention, statistical arbitrage, behavioral finance

JEL Classification: G14, G15

Suggested Citation

Seasholes, Mark S. and Wu, Guojun, Predictable Behavior, Profits, and Attention (January 5, 2005). AFA 2006 Boston Meetings Paper. Available at SSRN: or

Mark S. Seasholes (Contact Author)

Hong Kong University of Science & Technology (HKUST) ( email )

Clear Water Bay, Kowloon
Hong Kong
+852 2358-7668 (Phone)


Guojun Wu

University of Houston ( email )

220F Melcher Hall
Houston, TX 77204-6021
United States
713-743-4813 (Phone)
713-743-4789 (Fax)


China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030

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