Peiran Jiao

  Tuesday, 30th January 2018

  12:30 - 13:30


   Learning in Categories and the Attention Constraints of Investors


Investment based on asset categories (aka style investing) is considered a cause of major financial anomalies, such as the abnormal stock price gains of companies that changed to dotcom names during the Internet bubble without other changes in strategy. However, the reasons for this categorical behavior are unclear. In this project, we will conduct the first experimental test of the hypothesis that attention constraints contribute to style investing. The efficient allocation of limited attention can encourage learning in categories, because category-level data provides information about all members, whereas stock-specific data provides information only about the individual stock. This theory predicts that attention to categories is driven by the confluence of psychological elements, like information-processing ability, and economic elements, like the number of stocks within a category. We plan to directly investigate these predictions by measuring the amount of time participants spend looking at category-level vs stock-specific information in a simulated financial environment, varying these psychological and economic predictors. Moreover, we can test whether information-processing ability in our financial context relates to broader cognitive traits. Thus, we hope to shed light on how limits on the ability to process information may result in economic anomalies that persist and even grow at large scales.