Rational Inattention and Choice Under Risk: Explaining Violations of Expected Utility Through a Shannon Entropy Formulation of the Costs of Rationality
We propose a model of stochastic choice in which the error term is derived from a maximizing framework in which it is costly for agents to make decisions optimally. We argue that the model has testable implications, and is closely related to other models used in the literature on choice under risk. We test this model over experimental data, replicate some conclusions of the existing literature, and show our model to perform well against models in the field in current use. Copyright International Atlantic Economic Society 2009
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Volume (Year): 37 (2009)
Issue (Month): 1 (March)
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References listed on IDEAS
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- Cubitt, Robin P, 1996. "Rational Dynamic Choice and Expected Utility Theory," Oxford Economic Papers, Oxford University Press, vol. 48(1), pages 1-19, January.
- Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
- Harless, David W & Camerer, Colin F, 1994. "The Predictive Utility of Generalized Expected Utility Theories," Econometrica, Econometric Society, vol. 62(6), pages 1251-89, November.
- Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-24, December.
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- Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
- Hey, John D., 1995. "Experimental investigations of errors in decision making under risk," European Economic Review, Elsevier, vol. 39(3-4), pages 633-640, April.
- Christopher A. Sims, 2006. "Rational Inattention: Beyond the Linear-Quadratic Case," American Economic Review, American Economic Association, vol. 96(2), pages 158-163, May.
- Hey, John D & Orme, Chris, 1994. "Investigating Generalizations of Expected Utility Theory Using Experimental Data," Econometrica, Econometric Society, vol. 62(6), pages 1291-1326, November.
- Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
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