Paying (for) Attention: The Impact of Information Processing Costs on Bayesian Inference

23 Pages Posted: 24 Oct 2016 Last revised: 1 Aug 2018

See all articles by Scott Duke Kominers

Scott Duke Kominers

Harvard University

Xiaosheng Mu

Harvard University - Department of Economics

Alexander Peysakhovich

Yale University - Human Cooperation Lab

Date Written: July 23, 2018

Abstract

Human information processing is often modeled as costless Bayesian inference. However, research in psychology shows that attention is a computationally costly and potentially limited resource. We thus study Bayesian agents for whom computing posterior beliefs is costly; such agents face a tradeoffs between economizing on attention costs and having more accurate beliefs. We show that even small processing costs can lead to significant departures from the standard costless processing model. There exist situations in which beliefs can cycle persistently and never converge. In addition, when updating is costly, agents are more sensitive to signals about rare events than to signals about common events. Thus, these individuals can permanently overestimate the likelihood of rare events. There is a commonly held assumption in economics that individuals will converge to correct beliefs/optimal behavior given sufficient experience. Our results contribute to a growing literature in psychology, neuroscience, and behavioral economics suggesting that this assumption is both theoretically and empirically fragile.

Keywords: behavioral economics, learning, bayesian updating

Suggested Citation

Kominers, Scott Duke and Mu, Xiaosheng and Peysakhovich, Alexander, Paying (for) Attention: The Impact of Information Processing Costs on Bayesian Inference (July 23, 2018). Available at SSRN: https://ssrn.com/abstract=2857978 or http://dx.doi.org/10.2139/ssrn.2857978

Scott Duke Kominers

Harvard University ( email )

Rock Center
Harvard Business School
Boston, MA 02163
United States

HOME PAGE: http://www.scottkom.com/

Xiaosheng Mu

Harvard University - Department of Economics ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Alexander Peysakhovich (Contact Author)

Yale University - Human Cooperation Lab ( email )

New Haven, CT
United States

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