UC Berkeley

Frictions affecting information demand play an essential role in equilibrium outcomes of financial markets, and the behavior of investors, managers, and regulators. Demand-side information frictions can be the result of costly information acquisition or psychological factors, and can interact with various behavioral biases resulting in outcomes that would be puzzling in traditional, entirely rational models.

The first chapter models the learning and trading decision of investors in an economy with regular public announcements and costly information. Scheduled public announcements affect the information acquisition decision of traders, who in equilibrium focus their learning on stocks with upcoming announcements. When learning is endogenous, public announcements have a significant effect on information acquisition, price movements, and price informativeness. Using quarterly earnings announcements as regular and major information events, I document a number of patterns consistent with rational allocation of limited learning capacity. In the time-series, I show that costly information acquisition results in lower learning and price movements before announcements on busier weeks. In the cross-section of stocks, I find that learning and price movements are lower when other announcing firms are more valuable to learn about. The results suggest that learning plays a significant role in pre-announcement market movements, previously mainly attributed to leakage of insider information.

In the second chapter, I propose a new approach to model the role of regret and rejoice in dynamic stopping problems; where past outcomes the agent chose not to reach act as reference points. An agent with regret induced reference points exhibits history dependent behavior, and if the stopping decision affects the set of available information, a regret agent is more likely to continue (stop) than a fully rational decision maker when regret level is sufficiently high (low). I show that this approach to regret and rejoice can provide a unified explanation for various previously analyzed phenomena in investor and CEO behavior, such as the disposition effect, the sunk cost fallacy, and the escalation of commitment. In an equilibrium asset pricing framework, regret generates asymmetric price reaction to news, where good information is reflected in prices to a lower extent than bad news.