Investors’ Cognitive Mechanisms within the Drug Development Industry

Tiran Rothman


Over the last 20 years the drug development industry has been rapidly changing with the formation of young companies generally pursuing the development of one or two innovative drugs. This market alteration from `big pharma` game (e.g. Pfizer or Novartis) to specialized firms created by technological breakthroughs, economic justification and changes in medical insurance. Quick overview of current sector structure reveals that most of it companies are young firms developing early stage drugs, i.e. dream is the most valuable asset they held. These dreams are publically magnified with the wealth of information, especially with the substantial role of social networks, what leads to high investors` attention. These factors, along with low interest rate in current world markets, lead to market optimism in this high risk sector. The wealth and availability of young innovative firms` information, changes then the way investors pay attention to information and even how they chose their winning stocks - from long value investment in traditional companies to what seems like an event driven strategy. To wit, we observe that higher trading is held around regulatory events. Exploring these milestone events reveal what seems like a speculative “micro bubbles”. In this paper, we try to portrait a whole picture on the attention hypothesis and merge it with these “micro bubbles” we assume to be in the drug development industry. 


Attention; Behavioral Finance; inefficient market; Corporate News; Event Study; Financial Markets; Pharmaceutical Companies; Probability Weighting Functions.

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