The option to pay attention

We use a novel and unique dataset to measure attention to securities—individuals’ stock-following over time (watchlists)—to provide evidence that attention to securities reacts differently to various types of uncertainty. We find that market-wide uncertainty, measured by the VIX index, depresses overall attention to securities. However, the effect of firm-level uncertainty on attention to securities is more subtle. Viewing the decision to follow a security as a real option, we provide evidence that an increase in firm-specific risk (ambiguity), which increases (reduces) option value, increases (reduces) attention to a security. We also find that peer firms serve as substitutes for attention allocation