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Stochastic Choice: An Optimizing Neuroeconomic Model

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  • Michael Woodford

Abstract

A model is proposed in which stochastic choice results from noise in cognitive processing rather than random variation in preferences. The mental process used to make a choice is nonetheless optimal, subject to a constraint on available information-processing capacity that is motivated by neurophysiological evidence. The optimal information-constrained model is found to offer a better fit to experimental data on choice frequencies and reaction times than either a purely mechanical process model of choice (the drift-diffusion model) or an optimizing model with fewer constraints on feasible choice processes (the rational inattention model).

Suggested Citation

  • Michael Woodford, 2014. "Stochastic Choice: An Optimizing Neuroeconomic Model," American Economic Review, American Economic Association, vol. 104(5), pages 495-500, May.
    • Handle: RePEc:aea:aecrev:v:104:y:2014:i:5:p:495-500
    Note: DOI: 10.1257/aer.104.5.495
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    References listed on IDEAS

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    1. John D. Hey, 2018. "Experimental investigations of errors in decision making under risk," World Scientific Book Chapters, in: Experiments in Economics Decision Making and Markets, chapter 17, pages 381-388, World Scientific Publishing Co. Pte. Ltd..
    2. Michael Woodford, 2014. "An Optimizing Neuroeconomic Model of Discrete Choice," NBER Working Papers 19897, National Bureau of Economic Research, Inc.
    3. Sims, Christopher A., 2010. "Rational Inattention and Monetary Economics," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 4, pages 155-181, Elsevier.
    4. Ernst Fehr & Antonio Rangel, 2011. "Neuroeconomic Foundations of Economic Choice--Recent Advances," Journal of Economic Perspectives, American Economic Association, vol. 25(4), pages 3-30, Fall.
    5. Anton A. Cheremukhin & Anna Popova & Antonella Tutino, 2011. "Experimental evidence on rational inattention," Working Papers 1112, Federal Reserve Bank of Dallas.
    6. Ballinger, T Parker & Wilcox, Nathaniel T, 1997. "Decisions, Error and Heterogeneity," Economic Journal, Royal Economic Society, vol. 107(443), pages 1090-1105, July.
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    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D87 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Neuroeconomics

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