Date Added: Oct 2009
The invisibility of information precludes a direct test of attention allocation theories. To surmount this obstacle, the authors develop a model that uses an observable variable - the state of the business cycle - to predict attention allocation. Attention allocation, in turn, predicts aggregate investment patterns. Because the theory begins and ends with observable variables, it becomes testable. They apply the theory to a large information-based industry, actively managed equity mutual funds, and study its investment choices and returns.