Costly Interpretation of Asset Prices

We propose a model in which investors cannot costlessly process information from asset prices. At the trading stage, are boundedly rational, and their interpretation of prices injects noise into price, generating source endogenous trading. Our setup predicts price momentum yields excessive return volatility volume. In an overall equilibrium, optimally choose sophistication levels by balancing benefit beating market against cost acquiring sophistication. There can exist strategic complementarity acquisition, leading to multiple equilibria. This paper was accepted Gustavo Manso, finance.