Markets are supposed to respond to information. New facts arrive, prices adjust, some bald man on CNBC opines and we all move on. But that tidy story assumes something big: that investors are always paying attention. Anyone who works with other people (or really just lives in the world) knows that in reality, attention is scarce, unevenly allocated, and often triggered by things that have very little to do with fundamentals. That simple observation sits at the core of In Search of Attention by Zhi Da, Joseph Engelberg, and Pengjie Gao.

Their key move is deceptively simple. Instead of inferring investor attention from indirect proxies like volume, volatility, or news coverage, they use something much more literal: Google searches. If retail investors suddenly start searching for “S&P 500,” they are, almost by definition, paying attention to the S&P 500 Index. Search volume is revealed attention, not an assumption about attention. This distinction matters. Volume can rise for many reasons unrelated to attention. News can be published and ignored. Price can move without anyone understanding why. But searching is an active choice. It is cognitive effort being spent.

Using Google’s Search Volume Index (SVI), Da, Engelberg, and Gao show several things that should make investors uncomfortable. First, attention is only weakly explained by the usual suspects. Market cap, analyst coverage, news, turnover — together they explain very little of the variation in search activity. Attention is its own state variable, not just a noisy transformation of things we already measure.

Second, and more interestingly, changes in attention predict short-term returns, but not in a way that looks like information. When retail attention spikes, prices tend to rise over the next week or two, particularly in smaller stocks. Then those gains reverse. This is classic price pressure. People pay attention, they buy, prices go up temporarily, and then gravity returns.

The IPO results make this especially clear. IPOs that attract large increases in search activity around issuance have much higher first-day returns and worse long-run performance. The interpretation is not subtle. Retail attention amplifies initial enthusiasm and pushes prices away from fundamentals, only for that excess to unwind later. Attention creates motion, not value.

For investors, this has two important implications.

First, not all predictors of returns are informational. Some signals work precisely because they are not about fundamentals at all. They are about flows, behavior, and constraints. Attention is one of those. When people look, they act. When they act in a lopsided way, prices move. But these are fragile effects. They live on short horizons and reverse once attention dissipates.

Second, this is a reminder that many strategies fail because they confuse cause and confirmation. A spike in attention that coincides with rising prices can easily be mistaken for information being revealed. In reality, it may just be demand chasing salience. The paper is careful to show that attention leads returns, not the other way around, and that the effect is strongest where retail trading is most dominant. That is exactly what you would expect from price pressure, and exactly what you would not expect from new information about cash flows (who needs to look up cash flows when you can just pile into some stupid meme stock?).

There is also a deeper lesson here about backtesting. Attention effects look great in environments where retail participation is high, liquidity is ample, and constraints are loose. They quietly disappear when those conditions change. Treating attention as a permanent source of alpha rather than a situational force is a category error.

The broader contribution of the paper is methodological. It shows that measuring the right latent variable matters more than refining the wrong proxy. Attention was always there, influencing prices. We just didn’t have a clean way to see it. Google search data provided that window.

The takeaway is not “trade Google searches.” It is this: markets move not just on what investors know, but on what they notice. And those two things are very different.

Disclaimer

This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only and on the understanding that the recipient has sufficient knowledge and experience to be able to understand and make their own evaluation of the proposals and services described herein, any risks associated therewith and any related legal, tax, accounting, or other material considerations. To the extent that the reader has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, prospective investors are encouraged to contact HTAA or consult with the professional advisor of their choosing.

Except where otherwise indicated, the information contained in this article is based on matters as they exist as of the date of preparation of such material and not as of the date of distribution of any future date. Recipients should not rely on this material in making any future investment decision.

The S&P 500® Index is designed to measure the performance of the large-cap segment of the US equity market. It is float-adjusted market capitalization weighted. Any reference to or definition of the S&P 500 within this material is provided solely for informational and illustrative purposes.