Dynamic Attention Allocation in Risky Asset Market

Abstract

This paper introduces a noisy rational expectation model that incorporates the dynamics between information acquisition and attention allocation. The model, differentiated from standard frameworks, allows investors to endogenously choose their attention allocation to multiple noisy signals, enabling an analysis of the dynamic interaction. A significant aspect of the model is the correlation between investors' attention allocation and the anticipated value of the terminal payoff under a riskneutral measure. The model demonstrates that the marginal cost of attention increases with attention allocation, and this cost is proportional to the expected value of a certain variance under the risk-neutral measure.