Investor Attention: Overconfidence and Category Learning

By Lin Peng. 2006

1,383 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/8ccb30907dd28c60e1dd32dd00f6891ad11d283e

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

In Finance

Citations in the corpus

Limited Investor Attention and Stock Market Misreactions to Accounting Information (2011, positive): “…to fundamental shocks (Peng 2005; Peng and Xiong 2006), how delayed processing of new information affects the dynamics of asset price volatility (Peng and Xiong 2002), how neglect of demographic information affects asset prices (DellaVigna and Pollet 2007), and how informed parties make…”
SELECTIVE ATTENTION AND LEARNING (2014, background): “…of the models in the literature start from the premise that people are “rationally inattentive” and optimally allocate their limited attention given the underlying stochastic environment (Sims 2003, 2006; Peng and Xiong 2006; Mackowiak and Wiederholt 2009; Gabaix 2013; Woodford 2009, 2012a, 2012b).”
Investor Attention and Stock Returns (2020, positive): “The model in equation (1) implies that the true investor attention A∗t is related to the subsequent stock return, which is consistent with the predictions of attention theories, such as those of Peng and Xiong (2006).”
Retail investor attention and stock price crash risk: Evidence from China (2019, positive): “have applied numerous indirect measures of RIA, including, for example, extreme stock returns (Barber and Odean, 2008), trading volume (Peng and Xiong, 2006), and advertising expenses (Grullon et al.”
Attention allocation and return co-movement: Evidence from repeated natural experiments (2019, neutral): “Financial economists have been using the framework of attention allocation/information acquisition to explain puzzling asset pricing phenomena such as the co-movement of asset prices (Peng and Xiong, 2006; Veldkamp, 2006).”
R2 and Idiosyncratic Risk are not Interchangeable (2014, positive): “Theoretical papers such as West (1988), Campbell et al. (2001), and Peng and Xiong (2006) point out that the information-efﬁciency interpretation of return R 2 is difﬁcult to reconcile with standard models, in which investors react rationally to information.”
Learning in Financial Markets (2009, neutral): “Other interesting topics not covered here include endogenous information acquisition (e.g., Veldkamp (2006), Peng and Xiong (2006), Van Nieuwerburgh and Veldkamp (2008, 2009)), non-Bayesian learning (e.g., Gervais and Odean (2001), Brav and Heaton (2002), Piazzesi and Schneider (2007)),…”
Overreaction to Intra-Industry Information Transfers? (2008, positive): “The explanation in Peng and Xiong (2006) appeared promising initially, as it offers a theory based on investor overconfidence and limited investor attention which suggests positive comovement across returns of firms in the same sector, and also negative autocorrelation in firm-level returns.”
Investor Attention and FX Market Volatility (2015, positive): “Peng and Xiong (2006) show that investor inattention is reﬂected in a tendency to focus on market-and industry-level information, rather than ﬁrm-speciﬁc information.”