On that first leaders’ debate Nick Clegg was not astoundingly brilliant. For this reason, the instant reaction of some commentators was quite downbeat: “It’s still about blues versus reds” said the FT’s Jim Pickard; “unlikely to be a game changer”, said Tim Montgomerie; and Jackie Ashley called Brown the winner.
So, why did Clegg win so much support? It’s because many voters don’t normally pay much attention to politics. They simply hadn’t given the Lib Dems much thought. The leaders’ debate changed this, by bringing Mr Clegg to their notice. He only had to turn up sober to be a winner.
Because the political classes are obsessed with political minutiae, they don’t appreciate this and so some missed the significance of that debate.
A similar thing explains Congress’s interest in Goldman Sachs. Any rival investment banker could for years have given you allegations of - ahem - sharp business acumen at Goldman’s. So why should such allegations be more noticed now than years ago? It’s because the financial crisis brought Goldman’s to greater public attention. Hence Congress’s grandstanding.
Goldman’s is much the same company as it was a few years ago, just as Clegg is the much the same guy. The obloquy of one and the acclaim of the other arise from how attention has shifted, not from how they’ve changed.
However, advertisers and TV bosses do know that attention matters. This is why adverts get repeated so much. If they tell us about a price comparison site only once or twice, we’ll forget. We need the message rammed home every 15 minutes. It’s also why the BBC ran that trailer during Doctor Who. BBC bosses knew that it wasn’t enough to trail Over the Rainbow days before or to publicize it in TV listings. It needed more attention.
The underlying theme here is that people don’t - can’t - know everything, so we limit our attention to what we need to know. The result is that it can take some effort to change our information set.
This has effects in financial markets. It might help explain the profitability of momentum strategies - the fact that stocks that have recently risen carry on rising. When a share rises a low, it attracts attention which attracts more buying; in the presence of even informal short sales constraints, prices are set by optimists.
It can also mean that share prices move because of prior information - in clear violation of the efficient market hypothesis. For example, we know that beer consumption is heavy among 20-somethings. If, therefore, a lot of people are born in a given year, you’d expect strong beer consumption 20 years later, which would benefit brewing stocks. The EMH says this should cause such stocks to rise in the year when many people are born. However, Stefano Dellavigna has shown (pdf) that in fact the stocks rise in the year of the consumption, 20 years later. This, he suggests, is because of limited attention; investors don’t pay heed to the importance of demographics.
Which brings me to my point, insofar as I have one. Gilt yields have fallen in the last couple of days as the Greek crisis has intensified. This suggests markets regard gilts as one of the good guys that benefit from a flight to quality, rather than PIIGs-type bonds that suffer contagion effects.
If you believe in the EMH, this just shows that the UK is not like Greece. But what if investors don’t have full information but limited attention? What if these cognitive limits cause them to overweight information such as our relatively low debt-GDP ratio (yes - PDF) and long debt maturity, but underweight other information which might become relevant?
I’m not saying this is happening - I suspect it isn’t. But if I were a Tory desperately trying to cling onto the idea that the UK is like Greece, I’d be using the notion of limited attention as part of my argument.