Decision Making with Rational Inattention
49 Pages Posted: 29 Jul 2012
Date Written: July 27, 2012
Attention scarcity is a limitation on the ability to incorporate information into actions with state-contingent consequences. In a menu choice setting, we study an axiomatic model of decision making with scarce attention. A decision maker satisfying our axioms acts as if she chooses a joint distribution over a product space of states and signals. The decision maker uses information from the joint distribution to make better ex-post choices from menus, and attention scarcity is reflected in a subjective cost of information. Our focus on ex-ante preferences allows us to identify anticipated attention scarcity from choice behavior, and thereby clarify the decision theoretic foundations of rational inattention models proposed in Sims (1998, 2003).
Keywords: information measure, menu choice, mutual information, rational inattention
JEL Classification: D81, D82, D83
Suggested Citation: Suggested Citation