Rational inattention and portfolio selection

Lixin Huang; Hong Liu

doi:10.1111/j.1540-6261.2007.01263.x

Rational inattention and portfolio selection

Lixin Huang
, Hong Liu

Research output: Contribution to journal › Article › peer-review

106 Scopus citations

Abstract

Costly information acquisition makes it rational for investors to obtain important economic news with only limited frequency or limited accuracy. We show that this rational inattention to important news may make investors over- or underinvest. In addition, the optimal trading strategy is "myopic" with respect to future news frequency and accuracy. We find that the optimal news frequency is nonmonotonic in news accuracy and investment horizon. Furthermore, when both news frequency and news accuracy are endogenized, an investor with a higher risk aversion or a longer investment horizon chooses less frequent but more accurate periodic news updates.

Original language	English
Pages (from-to)	1999-2040
Number of pages	42
Journal	The Journal of Finance
Volume	62
Issue number	4
DOIs	https://doi.org/10.1111/j.1540-6261.2007.01263.x
State	Published - Aug 2007

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title = "Rational inattention and portfolio selection",

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AB - Costly information acquisition makes it rational for investors to obtain important economic news with only limited frequency or limited accuracy. We show that this rational inattention to important news may make investors over- or underinvest. In addition, the optimal trading strategy is "myopic" with respect to future news frequency and accuracy. We find that the optimal news frequency is nonmonotonic in news accuracy and investment horizon. Furthermore, when both news frequency and news accuracy are endogenized, an investor with a higher risk aversion or a longer investment horizon chooses less frequent but more accurate periodic news updates.

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Rational inattention and portfolio selection

Abstract

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