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February 25, 2007
Irrational Inattention, or Why Traders Can't Read, Part XXXIV
I just love this finding from a new Federal Reserve study. It confirms all my favorite cynical and utterly non-empirical beliefs about traders' reading skills:Our results suggest that market participants might be focusing irrationally on the headline number, as opposed to the most precise available data in a data release. And, while this does not necessarily imply that irrationality of market participants explains a large share of overall asset price movements, reading the text of the data release seems to be something that should be extraordinarily easy for the markets.
... Some recent research in macroeconomics and finance has discussed the possibility of "rational inattention" in which agents optimally choose not to collect information because it is costly to do so (e.g. Sims, 2006). Looking up the unrounded number in an anticipated and closely-watched data release is surely not costly. Accordingly, if some investors are looking only at the headline number, this seems more like irrational inattention to us.
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