Emotional Inattention

Abstract

We propose a framework where a decision-maker allocates attention across payoff-dimensions, such as different consumption decisions, states of the world, or time periods. Attention to a dimension is instrumentally valuable, as it enables better decisions, but also leads to an emotional response that scales with the amount of attention and the payoff of the dimension. The framework predicts novel forms of well-known biases, including optimism, subjective probability weighting, and dynamic inconsistency, and provides a unifying explanation for these and other behavioral phenomena, such as the ostrich effect, incomplete consumption smoothing, and default effects.

Keywords: Attention, attention utility, information, adaptive preferences

JEL Classification: D81, D83