Supplementary Appendix for “Rational Attention Allocation over the Business Cycle”: Model Simulation Not for publication

In this supplementary appendix, we use a numerical example to illustrate the model’s predictions for the same measures of attention, portfolio dispersion, and performance as the ones we measure in the data. The goal of this exercise is to confirm that the model makes the same qualitative predictions for these observables as for the slightly different measures of attention allocation, portfolio dispersion, and fund performance for which we formally proved our propositions. Notably, we do not attempt to quantitatively account for all time-series and cross-sectional moments of actively managed fund portfolio holdings and returns. Such a task would be beyond the scope of this paper and indeed beyond the current state of the literature. Our model is too stylized along many dimensions to deliver on such a task. For example, it has only three assets and no heterogeneity in risk aversion, prior beliefs, or initial wealth among funds, and no heterogeneity in information capacity among skilled managers. Adding such features could improve the predictions, but only at the cost of obscuring the main mechanisms operating in the model.