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Experimental evidence on rational inattention

  • Anton Cheremukhin
  • Anna Popova
  • Antonella Tutino

We show that rational inattention theory of Sims (2003) provides a rationalization of choice models à la Luce and gives a structural interpretation to probability curvature parameters as reflecting costs of processing information. We use data from a behavioral experiment to show that people behave according to predictions of the theory. We estimate attitudes to risk and costs of information for individual participants and document overwhelming heterogeneity in these parameters among a relatively homogeneous sample of people. We characterize, both theoretically and empirically, the aggregation biases this heterogeneity implies and find these biases to be substantial.

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File URL: http://www.dallasfed.org/assets/documents/research/papers/2011/wp1112.pdf
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Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 1112.

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Date of creation: 2011
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Handle: RePEc:fip:feddwp:1112
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  1. repec:cup:cbooks:9780521815888 is not listed on IDEAS
  2. Alisdair McKay & Filip Matejka, 2011. "Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model," 2011 Meeting Papers 535, Society for Economic Dynamics.
  3. Antonella Tutino, 2010. "Rationally inattentive macroeconomic wedges," Working Papers 1005, Federal Reserve Bank of Dallas.
  4. Barbera, Salvador & Pattanaik, Prasanta K, 1986. "Falmagne and the Rationalizability of Stochastic Choices in Terms of Random Orderings," Econometrica, Econometric Society, vol. 54(3), pages 707-15, May.
  5. Daniel G. Goldstein & Gerd Gigerenzer, 2011. "The beauty of simple models: Themes in recognition heuristic research," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 6(5), pages 392-395, July.
  6. 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.
  7. 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.
  8. Mirko Wiederholt, 2010. "rational inattention," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
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