Motivated by psychological evidence that attention is a scarce cognitive resource, we model investors' attention allocation in learning and study the effects of this on asset-price dynamics. We show that limited investor attention leads to ``category-learningquot; behavior, i.e., investors tend...

We study how sophisticated investors, when faced with changes in information environment, adjust their information acquisition and trading behavior, and how these changes in turn affect market efficiency. We find that, after exogenous reductions of analyst coverage due to closures of brokerage...

Standard models of informed speculation suggest that traders try to learn information that others do not have. This result implicitly relies on the assumption that speculators have long horizons, i.e, can hold the asset forever. By contrast, we show that if speculators have short horizons, they...

Existing literature continues to be unable to offer a convincing explanation for the volatility of the stochastic discount factor in real world data. Our work provides such an explanation. We do not rely on frictions, market in completeness or transactions costs of any kind. Instead, we modify a...

Limits to arbitrage play a central role in behavioral finance. They are thought to interfere with arbitrage processes so that security prices can deviate from true values for extended periods of time. We describe a recent financial innovation that allows limits to arbitrage to be sidestepped,...

We propose a model of equilibrium contracting between two agents who are quot;boundedly rationalquot; in the sense that they face time-costs of deliberating current and future transactions. We show that equilibrium contracts may be incomplete and assign control rights: they may leave some...

It is common to analyze the effects of alternative monetary policy commitments under the assumption of fully model-consistent expectations. This implicitly assumes unrealistic cognitive abilities on the part of economic decision makers. The relevant question, however, is not whether the...

We conduct a laboratory experiment to shed light on the cognitive limitations that may affect the way decision makers respond to changes in their economic environment. The subjects solve a tracking problem: they estimate the probability of a binary event, which changes stochastically. The...

This paper extends the benchmark New-Keynesian model by introducing two frictions: (1) agent heterogeneity with incomplete markets, uninsurable idiosyncratic risk, and occasionally binding borrowing constraints; and (2) bounded rationality in the form of level-k thinking. Compared to the...

We propose a new principle for measuring the cost of information structures in rational inattention problems, based on the cost of generating the information used to make a decision through a dynamic evidence accumulation process. We introduce a continuous-time model of sequential information...