Attention Cascades and Delegated Portfolio Management

Abstract

This paper studies “attention cascade” in a delegated portfolio management setting. Empirically, “attention cascades” refer to two types of (related) cascade. First, investors would pay more attention to the mutual funds that hold more stocks which have grabbed the investors’ attention. Second, mutual fund managers would pay more attention to the stocks that investors have paid attention to. Using the Google search volume index of stock tickers, I construct a fund-level measure of attention. I use fund-level, holding-level, and stock-level analyses to study the implications of cascades on fund flow, performance, managers’ skill, trading, and stock prices. I find that both types of cascade exist, but neither facilitates efficient capital allocation.Theoretically, “attention cascade” refers to the fund manager’s incentive to pay attention to whatever the investor has paid attention to. It gives a unified framework in which the theoretical attention cascade implies both types of empirical cascade. The model also gives implications on fund flow, performance, and trading to illustrate the capital allocation inefficiency found in the empirical analyses. Finally, the model illustrates that the inefficiency of information acquisition is the fundamental problem for the attention cascade.