Brad M. Barber and Terrance Odean
A different version of this chapter originally appeared in The Review of Financial Studies, 2008, 21(2), 785–818. The current version includes additional material examining the asset-pricing implications of our model of attention-based buying but does not include the theoretical model from the appendix of the original paper.
Attention is a scarce resource. When there are many alternatives, choices that attract attention are more likely to be chosen. If the salient attributes of a choice are critical to our utility, attention serves us well. If not, attention may lead to suboptimal choices. In this chapter, we test the proposition that individual investors are more likely to buy, rather than sell, those stocks that catch their attention. We posit that this is so because attention affects buying behavior more than selling. When choosing which common stocks to buy, investors face a huge search problem. There are thousands of possibilities. It is impossible—without the aid of a computer—for most investors to evaluate the merits of every available common stock. When selling, however, most investors consider only stocks they already own. These are typically few in number and can be considered one by one. While each investor does not buy every single stock that grabs his attention, individual investors are more likely to buy ...