1. SS 200 Presentation February 11, 2004 Ye Li
Attention
SS 200 Presentation
February 11, 2004
Ye Li

2. Overview Psychology background Behavioral economics and attention
Gabaix et al. – “The Allocation of Attention: Theory and Evidence”, 2003
Behavioral finance and attention
Barber and Odean – “All That Glitters”, 2003
D’Avolio and Nierenberg – “Investor Attention: Evidence from the Message Boards”, 2003
Comments and Questions

3. What is Attention?
“Everyone knows what attention is. It is the taking possession by the mind, in clear and vivid form, of one out of what seem several simultaneously possible objects or trains of thought. Focalization, concentration, of consciousness are of its essence. It implies withdrawal from some things in order to deal effectively with others, and is a condition which has a real opposite in the confused, dazed, scatter-brained state which in French is called distraction...”
- James (1890)
“What information consumes is rather obvious: It consumes the attention of its recipients. Hence a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources that might consume it.”
–Simon (1971)
“Attention is the allocation of cognitive resources among ongoing processes.”
- Anderson (2000)

4. Early Psychological Theories of Attention
First theories emphasized “bottlenecks”
Shared belief that attention is limited by a bottleneck
Differed on where the source of bottleneck is:
Perception vs. response
Early vs. Late

5. Dichotic Listening Experiments
Shadowing - Messages are presented to both ears but subject is told to attend to only one of the messages and repeat it out loud.
Attended channel – easily understood and remembered
Unattended channel
Can identify noise vs. human voice, male vs. female
Can’t identify words, topic, language

6. Dichotic Listening Task

7. Early Selection Theory
Broadbent - A Filter Theory of Attention (1958)
Subject presented with digits simultaneously to each ear. They are asked to report all of the numbers.
Tended to report all the information coming to one ear first then all the information coming to the other ear.
If required to report digits in the order of arrival they did better the more time there is between presentations.
Theory claims:
Sensory channels have an unlimited capacity
There is a bottleneck allowing only one piece of
information into working memory at a time
A selective filter allows info from only one
channel at a time.
Info from unattended channel is completely blocked
Time is required to switch between channels

8. Attenuation Theory Problems with Broadbent’s model:
Errors in shadowing:

9. Attenuation Theory cont.
“Cocktail Party Effect”
Moray (1959)
Participants recognize own name
Treisman – Attenuation Theory (1960)
Two stage model
Physical filter (male vs. female voice, tones)
Semantic filter – words have “subjective loudness” and require certain loudness to be recognized. Attention increases the loudness
Certain things such as name always have low threshold

10. Late Selection Theory Deutsch and Deutsch (1963) and Norman (1968)
Assumes bottleneck is in short term memory
Early selection says short term memory is a small box and attention picks what goes in.
Late selection says short term memory is a large box but things in it will disappear unless attended to.

11. Blindness Phenomena Startling evidence to blindness towards unattended
Simons and Chabris (1999) – “Gorillas in our midst: sustained inattentional blindness for dynamic events”
Change Blindness
Rensink (1997, 2000) – “On the Failure to Detect Changes in Scenes Across Brief Interruptions”
Flicker Paradigm

12. Gorillas in Our Midst

13. Gorillas in Our Midst, cont

14. Flicker Paradigm

15. Behavioral Economists’ Approach
Kahneman (1973) explores attention as mental effort
More flexible than the bottleneck approach
Allows for detailed economic models of attention
Recent example
Gabaix et al., “The Allocation of Attention: Theory and Evidence”

16. Directed Cognition Cost-benefit model by Gabaix and Laibson (2002)
Agents analyze info that is likely to be useful and ignore info that is likely to be redundant
Ignore dominated goods
Don’t investigate goods with perfect information
Makes tractable predictions about attention allocation
Applied to an N-good game
Each box contains random payoff
After examination, subject picks a row and gets payoff of total sum of boxes in that row
Columns represent M different attributes
First column is revealed
Lower variance (and thus information) going left to right

17. N-good Game

18. Directed Cognition cont.
Summary of the model:
Step 1: Calculate expected benefits and costs of potential cognitive operators. Eg. What is the benefit of unmasking 3 boxes in the first row?
Step 2: Execute operation with the highest ratio of expected benefit to cost.
Step 3: Return to Step 1 until time has run out (for exogenous time games) or until this expected benefit to cost ratio falls below a threshold value (for endogenous time games)
For more (mathematically structured) detail, see paper

19. Exogenous vs. Endogenous Time Budgets
Two variants of the N-good game
Exogenous time budget - Game-specific time budget selected uniformly from [10,49] seconds for 12 games
Endogenous time budget - Fixed budget of 25 minutes to play as many N-good games as they choose
Players play both types of games
Order seems to make no difference
No learning effects

20. Alternative Models Simple comparison models
Column model – traverse boxes column by column (left to right), exploring same number of boxes as the yoked subject
Exogenous – same number of opening in each game as empirical
Endogenous – average number of openings as empirical
Row model – same except by rows, starting from the “best” row
Elimination by Aspects (Tversky 1972)
Leading psychology model of choice from a set of multi-attribute goods
Proceed aspect by aspect (left to right on columns) and eliminate goods (rows) with an aspect that falls below some threshold value
This threshold is calculated to generate box openings that average empirical openings.

21. Experiment Results Subject pool of 388 Harvard undergrads
Mean payoff of $29.23 (range $13.07-$46.69)
Played 28.7 (sd=7.9) games for the endogenous time budget (range 21-65)
Performance evaluated by comparing theoretical predictions generated by yoked simulations
Predictions made by number of boxes opened by column (left to right), row (best to worst by starting value), and an alternative row ordering (best to worst by end of game value)
Model outperforms all alternatives

22. Table of Results

23. Sample Figure

24. Behavioral Finance and Attention
Topics include
Asset Pricing Theory
Limits to Arbitrage
Systematic Trading Behavior
Media Influence
Information Disclosure

25. “All That Glitters”
Barber and Odean (2003) - “All that Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors”
Hypothesis – attention based buying is a result of difficulty individual investors have searching the thousands of potential stocks (unlike institutional investors which have more dedicated resources)
Prediction – stocks bought by individual investors on high-attention days tend to underperform compared to stocks sold by the same investors

26. “All That Glitters” cont.
High attention stocks determined by:
Talked about on news, magazines, etc.
Big winners/losers from prior day
Implicitly measured by abnormal trading volumes
Data sets
Investors with accounts at large discount brokerage
Investors at a smaller discount brokerage that advertises its trade execution quality
Investors with accounts at a large retail brokerage
Professional money managers
For details on attention-based buying model, see paper

27. Simulated Order Imbalances

28. Simulated Order Imbalances cont

29. Results

30. Results cont.

31. Results cont.

32. Results cont.

33. Internet and Attention
The internet provides a new source of attention data
Vast amounts of data for marketing purposes
Google search history
Message boards
D’Avolio and Nierenberg (2003) – “What attracts investor attention? Evidence from the message boards”

34. Evidence from the boards
Collected 42 million messages from Yahoo! Finance message boards (3.5 years)
Establish relation between message board activity and certain stock characteristics
IPO underpricings - most underpriced quintile gets 5 times as much attention as least underpriced
Stock splits – 2 for 1 split doubles number of posters for a year

35. IPO Underpricing

36. Stock Splits

37. Correlation with stock market