Attention Bias, Stock Selection and Implications for the Stock Market

Individual investors are subject to various biases while investing in the stock market. Limited attention is a bias that represents the selective approach of investors for choosing stocks that form part of their investment portfolio. Some events that create visibility of a stock, draw the attention of investors and individual investors are more likely to trade in those stocks that are known to them while discounting other prospective, stable yet unknown stocks. Such attention driven selection of stocks leads to trading behavior by the individual investors that may further have an impact on the market. Based on this premise, this study explores (i) the factors that catch the attention of individual investors; (ii) the impact of attention on stock trading; (iii) impact of attention induced trading on stock market; and (iv) factors that moderate the relationship between attention and stock trading. This study adopts the systematic literature review approach based on PRISMA guidelines. It is found that increased attention increases volatility and liquidity of the stock but the awareness about a firm triggers information search behavior of investors that makes trading informative and reduces the possibility of stock price crash.