Behavioural Finance: Attention Bias and our love of shiny things

This leads to detrimental decision making and outcomes that are contrary to our own good.

Studies have found that individual investors are more likely to buy rather than sell investments that catch their attention. If a stock receives hype in the media or has an extreme price movement, you're more likely to hit the "buy" button.

The most glaring example of attention bias in recent history was the GameStop mania saga. For those who don’t have a social media account, TV, or a Millennial in the family, let me summarise.

At the beginning of 2021, a group of active Reddit users wanted to target several hedge fund managers they saw as ‘corrupting the system’.

GameStop (GME) is a retail video game provider in the US. It’s a run of the mill sort of company listed on the New York Stock Exchange.

Several hedge fund managers decided to short this bricks and mortar retailer. This meant they were backing that the stock price would go down. But an army of Reddit users took issue with this and started buying shares in GameStop. They pushed the share price up and created huge losses for the hedge fund managers betting on it going down.

This became the biggest financial news story in the world. For six weeks the GameStop saga was leading global news.

It started as a David versus Goliath affair, but the media turned their attention to how much some traders were making. This is when ‘attention bias’ started to become a problem. The initial cause of the trade was lost, and it became about making a ‘quick buck’.

I want to expand on this further but first let me bring this back to the work by Daniel Kahneman. Kahneman found that attention bias arises particularly on the buy side of investing. Investors have thousands of stocks to invest in but are limited by how much information they can process before buying.

The sell side doesn’t face this problem because investors sell securities, they already own. Kahneman found the issue with attention-based purchases is that they can lead to disappointing returns or even loss, as the attention event can be a one-off or a false reason to invest in the first place.

That last sentence summarises what happened with investors who got caught up in the GameStop saga. Their attention bias overrode the fact that it was an abnormal event and had no basis for buying GME. Instead, all the attention saw thousands buy GME at eye watering prices.

The GameStop saga dissipated, and the media and market moved on. The attention on the stock waned and thousands were stuck with a mediocre company at an inflated price. All because their attention bias overrode their reasoning. Classic mind over money.

Attention bias it is not limited to this kind of scenario – it can also lead to ‘no-action’. This is where our attention on events and hype leads us to do nothing rather than our normal investment behaviour.

For example, the attention inflation and the resulting interest rate rise in 2022 and beyond is getting. The media has focused out attention on how ‘hard’ and ‘constraining’ it will be for our finances and financial well-being.

The thing is, since the initial headlines around this issue in January 2022, the equity market has rallied. This in a time that includes the start of the Ukrainian war and the first interest rate rise by the US Federal Reserve since December 2018.

The media attention, the negative sentiment in commentary and the fear of an unknown future - attention bias has caused distraction which has led to missed opportunities in being in the market, receiving capital growth and stronger than expected dividend returns highlighting how our mind can take over our money.

How do you overcome attention bias? It's simple to say but difficult in practice. You must remember headlines are made to generate clicks and not to generate investment returns. When you read a headline think to yourself, does this fit in with my investment plan? Quite often you'll find it's your inactivity that will generate your investment returns.

Part of this article comes from Evan Lucas’s upcoming book Mind over Money due for release in the Spring of 2022.