Limited Attention, Endogenous Learning and Expected Return

Abstract

Abstract: In this paper,informed traders are divided into insider traders and attentive traders.The information asymmetry between the two types of traders entails endogenous learning.Limited attention and endogenous learning behavior are introduced into the theoretical framework of dynamic trading.We explain how attention and learning behavior affect expected return by using the discrete-time model.The research shows that private information and the public information revealed by price have a substitution effect on the choice of trading strategy.At any stage,the expected return of insiders increases slightly with attention at first and then gradually diminishes.The expected return of attentive traders shows an inverted U-shaped change with attention at the beginning of trading and a linear change with attention at the end of trading.

Key words: information superiority, limited attention, endogenous learning, competition, expected return

Ding Yuehua, Liu Weiqi. Limited Attention, Endogenous Learning and Expected Return[J]. Management Review, 2022, 34(6): 41-52.

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