CROWDING OUT AND THE INFORMATIVENESS OF SECURITY PRICES

Individual investors trade less agressively on any particular piece of information as more investors observe it. The trades of the new investors observing a piece of information ''crowd out'' some of the trades of the old investors who observe that same piece of information. This paper shows that when traders are risk averse, these crowding out effects lead the proportions of traders who choose to observe one signal versus another to differ from the proportions that maximize the informativeness of prices.