Rationally Inattentive Behavior: Characterizing and Generalizing Shannon Entropy

46 Pages Posted: 11 Aug 2017 Last revised: 15 Feb 2021

See all articles by Andrew Caplin

Andrew Caplin

New York University (NYU) - Department of Economics; National Bureau of Economic Research (NBER)

Mark Dean

Columbia University

John Leahy

University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy

Date Written: August 2017

Abstract

We provide a full behavioral characterization of the standard Shannon model of rational inattention. The key axiom is "Invariance under Compression", which identifies this model as capturing an ideal form of attention-constrained choice. We introduce tractable generalizations that allow for many of the known behavioral violations from this ideal, including asymmetries and complementarities in learning, context effects, and low responsiveness to incentives. We provide an even more general method of recovering attention costs from behavioral data. The data set in which we characterize all behavioral patterns is "state dependent" stochastic choice data.

Suggested Citation

Caplin, Andrew and Dean, Mark and Leahy, John, Rationally Inattentive Behavior: Characterizing and Generalizing Shannon Entropy (August 2017). NBER Working Paper No. w23652, Available at SSRN: https://ssrn.com/abstract=3016922

Andrew Caplin (Contact Author)

New York University (NYU) - Department of Economics ( email )

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HOME PAGE: http://www.econ.nyu.edu/user/caplina/

National Bureau of Economic Research (NBER)

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Mark Dean

Columbia University ( email )

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John Leahy

University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy ( email )

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Ann Arbor, MI 48109
United States

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