The Limit of an Investor’s Capacity to Process Information

Abstract

Standard models of financial markets typically assume that investors can process available information efficiently and incorporate it into prices without substantial delay. However, research in behavioural finance and psychology suggests that individuals face limits in attention and cognitive processing capacity. Although prior studies document the consequences of limited investor attention in financial markets, less is known about how specific features of information environments jointly influence investors' decision quality and cognitive workload. This thesis addresses this gap by examining how information quantity, task complexity, irrelevant data, and time constraints affect financial decision-making.

The analysis is based on a controlled laboratory experiment in which participants perform stock valuation and trading tasks. Participants calculate the intrinsic value of firms using provided financial data and then decide whether to buy, hold, or sell the stock. Decision quality is measured using intrinsic value calculation accuracy and trading decision accuracy, while cognitive load is measured using self-reported mental effort.

The thesis consists of three studies. Study 1 examines the joint effects of information quantity and task complexity. The results show that both factors significantly reduce decision accuracy and that their interaction intensifies the decline in performance as cognitive demands increase. Study 2 introduces irrelevant financial information to examine whether non-diagnostic cues influence decision outcomes. The results indicate that irrelevant information reduces performance when the information environment is otherwise simple, although this effect weakens when overall information load is high, suggesting selective filtering of information. Study 3 examines the role of time constraints and shows that reducing time pressure significantly improves decision accuracy, particularly in tasks with high complexity and large information sets.

Overall, the findings provide experimental evidence that investor decision quality is strongly shaped by cognitive constraints. The thesis contributes to the literature on limited investor attention and cognitive load by demonstrating how multiple dimensions of information environments interact to influence financial decision-making. The results also have practical implications for financial disclosure design, suggesting that excessively complex or information-dense disclosures may hinder investors' ability to extract relevant signals.