All that Glitters

Academic Research: Barber and Odean 2008

Author: Daniel Seiler

Date: February 20, 2024

Just recently, as I made my way down the mountain, I witnessed a scene that felt all too familiar. A fellow skier, seemingly at a skill level akin to my own, glided slowly, but directly into one of those red poles at the slope's edge. Why, you might wonder, did this collision occur? Was it a lapse in attention or, paradoxically, an excess of it? This incident felt like a textbook example of 'target fixation,' a phenomenon where your focus locks onto something you wish to avoid—like a pole—only to find yourself heading straight for it. This isn't just about skiing; it's a quirk of human psychology affecting drivers, cyclists, and pedestrians alike. Our brains have a tendency to steer us towards where our eyes are fixed, often leading us closer to the very object we're determined to evade.

Target fixation is just one instance that highlights how attention is a constant in our lives, taking on various forms. Naturally, this leads us to consider its effects in other domains, particularly in areas as investing. In this context, the dynamics of attention are crucial, shaping decisions and influencing outcomes.

Brad Barber from UC Davis and Terrance Odean from Berkeley have studied how news and attention affect the way individual and professional investors buy stocks. The two leading financial economists suggest that news stories, good or bad, can sway investors' decisions, particularly those of individual investors who may not have as much data analysis support as professional investors do.

What are interesting findings?
  • Individual investors are more likely to buy stocks that have recently been in the news, regardless of whether the news was positive or negative. This suggests that mere attention can drive buying decisions.
  • Institutional investors, with their broader access to information and analytical tools, are less likely to be influenced by news attention alone. However, they are not completely immune to such effects, especially during significant market-moving events.
  • Stocks that receive higher attention due to news often experience short-term price price pressure. This can be followed by a correction as the news fades, and fundamentals take over.
  • There's a notable increase in trading volume and price volatility following news attention. This is consistent with the idea that news draws more traders to the market, leading to increased activity.

Why is it important for us?

The study underscores the significant influence of media and attention on investor behavior. While institutional investors may be less influenced by news alone, individual investors are more prone to making investment decisions based on recent news due to various behavioral biases. This has implications for market efficiency and the role of media in shaping financial markets.