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Overprecision and (Ir)rational Inattention

Author

Listed:
  • Ciril Bosch-Rosa
  • Muhammed Bulutay
  • Bernhard Kassner

Abstract

This paper integrates overprecision—a form of overconfidence where individuals overestimate the accuracy of their beliefs—into a canonical rational inattention model. We show that overprecision distorts belief updating directly by biasing the perceived value of new information and indirectly by amplifying the impact of attention costs. We test the model’s predictions in a pre-registered 2 x 2 belief-updating experiment that manipulates overprecision and information costs. The results confirm that overprecision reduces updating and that higher information costs lead to lower responsiveness to signals. While our pre-registered analysis finds no support for the predicted interaction between overprecision and attention costs, a more granular specification shows that the effect of information costs on belief updating is stronger for overprecise participants. These findings suggest that what appears as rational inattention partly reflects irrational inattention arising from misperceived prior accuracy, underscoring the need to distinguish informational frictions from cognitive biases when modeling attention.

Suggested Citation

  • Ciril Bosch-Rosa & Muhammed Bulutay & Bernhard Kassner, 2026. "Overprecision and (Ir)rational Inattention," Berlin School of Economics Discussion Papers 0086, Berlin School of Economics.
    • Handle: RePEc:bdp:dpaper:0086
    DOI: 10.48462/opus4-6028
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    References listed on IDEAS

    as
    1. Michaela Pagel, 2018. "A News‐Utility Theory for Inattention and Delegation in Portfolio Choice," Econometrica, Econometric Society, vol. 86(2), pages 491-522, March.
    2. Dmitry Taubinsky & Alex Rees-Jones, 2018. "Attention Variation and Welfare: Theory and Evidence from a Tax Salience Experiment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(4), pages 2462-2496.
    3. Dewan, Ambuj & Neligh, Nathaniel, 2020. "Estimating information cost functions in models of rational inattention," Journal of Economic Theory, Elsevier, vol. 187(C).
    4. Michael Thaler, 2024. "The Fake News Effect: Experimentally Identifying Motivated Reasoning Using Trust in News," American Economic Journal: Microeconomics, American Economic Association, vol. 16(2), pages 1-38, May.
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    JEL classification:

    • C83 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Survey Methods; Sampling Methods
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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