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Rational Inattention and Choice Under Risk: Explaining Violations of Expected Utility Through a Shannon Entropy Formulation of the Costs of Rationality


  • Maxim Pinkovskiy



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

Suggested Citation

  • Maxim Pinkovskiy, 2009. "Rational Inattention and Choice Under Risk: Explaining Violations of Expected Utility Through a Shannon Entropy Formulation of the Costs of Rationality," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 37(1), pages 99-112, March.
  • Handle: RePEc:kap:atlecj:v:37:y:2009:i:1:p:99-112
    DOI: 10.1007/s11293-008-9159-1

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    References listed on IDEAS

    1. 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.
    2. Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-824, December.
    3. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    4. Harless, David W & Camerer, Colin F, 1994. "The Predictive Utility of Generalized Expected Utility Theories," Econometrica, Econometric Society, vol. 62(6), pages 1251-1289, November.
    5. 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.
    6. 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.
    7. John Hey, 2001. "Does Repetition Improve Consistency?," Experimental Economics, Springer;Economic Science Association, vol. 4(1), pages 5-54, June.
    8. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
    9. Christopher A. Sims, 2006. "Rational Inattention: Beyond the Linear-Quadratic Case," American Economic Review, American Economic Association, vol. 96(2), pages 158-163, May.
    10. Cubitt, Robin P, 1996. "Rational Dynamic Choice and Expected Utility Theory," Oxford Economic Papers, Oxford University Press, vol. 48(1), pages 1-19, January.
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    Cited by:

    1. Michael Woodford, 2014. "An Optimizing Neuroeconomic Model of Discrete Choice," NBER Working Papers 19897, National Bureau of Economic Research, Inc.

    More about this item


    Expected utility theory; Rational inattention; Discrete choice; Experimental economics; D8;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty


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