Rational Inattention Via Ignorance Equivalence

50 Pages Posted: 11 Feb 2020

See all articles by Roc Armenter

Roc Armenter

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Michele Muller-Itten

University of Notre Dame

Zachary Stangebye

University of Notre Dame

Date Written: January 17, 2020

Abstract

We present a novel approach to finite Rational Inattention (RI) models based on the ignorance equivalent, a fictitious action with state-dependent payoffs that effectively summarizes the optimal learning and conditional choices. The ignorance equivalent allows us to recast the RI problem as a standard expected utility maximization over an augmented choice set called the learning-proof menu, yielding new insights regarding the behavioral implications of RI, in particular as new actions are added to the menu. Our geometric approach is also well suited to numerical methods, outperforming existing techniques both in terms of speed and accuracy, and offering robust predictions on the most frequently implemented actions.

Keywords: rational inattention, ignorance equivalence, costly learning

JEL Classification: D11, D81, D83, C63

Suggested Citation

Armenter, Roc and Muller-Itten, Michele and Stangebye, Zachary, Rational Inattention Via Ignorance Equivalence (January 17, 2020). Available at SSRN: https://ssrn.com/abstract=3521379 or http://dx.doi.org/10.2139/ssrn.3521379

Roc Armenter

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Michele Muller-Itten (Contact Author)

University of Notre Dame ( email )

3060 Jenkins Nanovic Hall
Notre Dame, IN 46556
United States

HOME PAGE: http://https://sites.google.com/site/mmulleritten/

Zachary Stangebye

University of Notre Dame ( email )

Notre Dame, IN 46556
United States
5746311054 (Phone)

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

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