Mind on My Money

How to invest wisely

John Nofsinger is an associate professor of finance at Washington State University and a speaker, writer, and scholar on behavioral finance. See full bio

August 20, 2008, Behavioral Economics

All That Glitters: Buying Attention Grabbing Stocks

Are stocks that glitter golden? Do we buy them?

Fools Gold There are many thousands of stocks you can buy. Do you review all of them before choosing? Do you search for specific characteristics you want? Most individual investors do not have the time, ability, or desire to make this formidable search. And of course, there are limits to how much information we can process.

One adaptation is to limit the choice set to ten alternatives instead of hundreds or thousands. Brad Barber and Terrance Odean limit their choice set to attention-grabbing stocks. While one investor may prefer value stocks and another growth stocks, both investors start with the stocks they noticed because of the recent attention. They test this hypothesis by focusing on three measures that are likely to be associated with attention-grabbing events: news (reported by Dow Jones News Service), unusual trading volume, and large recent price changes.

They find that individuals buy the stocks with high volume, large price gains the day before, large price drops the day before, and news events days. They also find that the buying behavior of individual investors is more heavily influenced by attention than the buying behavior of professional investors. Mutual fund managers are net sellers on the days individual are net buyers.

Do stocks that glitter turn out to be gold? Barber and Odean explain it like this:

"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." (page 813)

Their evidence shows that the attention-driven buying does not generate superior returns.

Reference: Brad Barber and Terrance Odean, 2008, "All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors," Review of Financial Studies, 21(2), 785-818.