Investor Attention: Overconfidence and Category Learning

54 Pages Posted: 6 Jul 2005 Last revised: 27 Aug 2010

See all articles by Wei Xiong

Wei Xiong

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Lin Peng

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Multiple version iconThere are 3 versions of this paper

Date Written: June 2005

Abstract

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.

Suggested Citation

Xiong, Wei and Peng, Lin, Investor Attention: Overconfidence and Category Learning (June 2005). NBER Working Paper No. w11400. Available at SSRN: https://ssrn.com/abstract=741549

Wei Xiong (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Lin Peng

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

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