The Option to Pay Attention

We use a novel dataset of individuals’ stock-following over time (watchlists), to examine how the perceived expected benefit of paying attention to a security affects the decision to start or stop following the security. Viewing the decision to follow securities as a real option, we provide evidence that the value of following a security (paying attention to a security over time) decreases in its ambiguity—Knightian uncertainty—and increases in its risk. Furthermore, the overall attention an individual pays to securities decreases in watchlist ambiguity and increases in its risk. These evidence provide new insights into information acquisition and processing decisions.