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Investor Attention: Overconfidence and Category Learning

Lin Peng and Wei Xiong

No 11400, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G0 G1 (search for similar items in EconPapers)
Date: 2005-06
New Economics Papers: this item is included in nep-evo, nep-fin and nep-fmk
Note: AP
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Published as Peng, Lin and Wei Xiong. "Investor Attention, Overconfidence And Category Learning," Journal of Financial Economics, 2006, v80(3,Jun), 563-602.

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