The Handbook of News Analytics in Finance

7.7 CONCLUSION

We propose an alternative model of decision making in which agents faced with many alternatives consider primarily those alternatives that have attention-attracting qualities. Preferences come into play only after attention has limited the choice set.

When alternatives are many and search costs high, attention may affect choice more profoundly than preferences do. If the attention-grabbing characteristics of an alternative coincide with the characteristics that increase utility, agents may benefit from the role of attention in reducing search costs. However, if attention and utility are orthogonal or negatively correlated, expected utility may be diminished. Under some circumstances, the utility of an alternative is affected by how many agents choose that alternative. Thus, the attention-attracting qualities of an alternative may indirectly detract from its utility. For example, a well-circulated article about a deserted vacation spot could attract the attention and the travel plans of many vacationers, each of whom would be disappointed by the crowds of like-minded tourists. Similarly, attention-based purchases by many investors could temporarily inflate a stock's price, leading to disappointing subsequent returns.

Attention-based decision making has implications for a wide variety of economic situations (e.g., hiring decisions or consumer purchases). In this chapter, we test this model of decision making in the context of common stock purchases. Choosing which ...