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Experimental evidence on rational inattention

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  • Anton A. Cheremukhin
  • Anna Popova
  • Antonella Tutino

Abstract

We show that rational inattention theory of Sims (2003) provides a rationalization of choice models 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.

Suggested Citation

  • Anton A. Cheremukhin & Anna Popova & Antonella Tutino, 2011. "Experimental evidence on rational inattention," Working Papers 1112, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddwp:1112
    DOI: 10.24149/wp1112
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    References listed on IDEAS

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    Cited by:

    1. Khaw, Mel Win & Stevens, Luminita & Woodford, Michael, 2017. "Discrete adjustment to a changing environment: Experimental evidence," Journal of Monetary Economics, Elsevier, vol. 91(C), pages 88-103.
    2. Camille Cornand & Frank Heinemann, 2018. "Experiments on macroeconomics: methods and applications," Working Papers halshs-01809937, HAL.
    3. Camille Cornand & Frank Heinemann, 2018. "Experiments on macroeconomics: methods and applications," Post-Print halshs-01809937, HAL.
    4. Camille Cornand & Frank Heinemann, 2014. "Experiments on Monetary Policy and Central Banking," Research in Experimental Economics, in: John Duffy (ed.), Experiments in Macroeconomics, volume 17, pages 167-227, Emerald Publishing Ltd.
    5. Camille Cornand & Frank Heinemann, 2015. "Macro-expérimentation autour des fonctions des banques centrales," Revue française d'économie, Presses de Sciences-Po, vol. 0(2), pages 3-47.
    6. Paola Manzini & Marco Mariotti, 2014. "Stochastic Choice and Consideration Sets," Econometrica, Econometric Society, vol. 82(3), pages 1153-1176, May.
    7. Gaglianone, Wagner Piazza & Giacomini, Raffaella & Issler, João Victor & Skreta, Vasiliki, 2022. "Incentive-driven inattention," Journal of Econometrics, Elsevier, vol. 231(1), pages 188-212.
    8. Johannes Becker & Jonas Fooken & Melanie Steinhoff, 2019. "Behavioral Effects of Withholding Taxes on Labor Supply," Scandinavian Journal of Economics, Wiley Blackwell, vol. 121(4), pages 1417-1440, October.
    9. Paola Manzini & Marco Mariotti, 2014. "Stochastic Choice and Consideration Sets," Econometrica, Econometric Society, vol. 82(3), pages 1153-1176, May.
    10. Michael Woodford, 2014. "Stochastic Choice: An Optimizing Neuroeconomic Model," American Economic Review, American Economic Association, vol. 104(5), pages 495-500, May.
    11. Abeler, Johannes & Jäger, Simon, 2013. "Complex Tax Incentives: An Experimental Investigation," IZA Discussion Papers 7373, Institute of Labor Economics (IZA).
    12. Mackowiak, Bartosz Adam & Matejka, Filip & Wiederholt, Mirko, 2020. "Rational Inattention: A Review," CEPR Discussion Papers 15408, C.E.P.R. Discussion Papers.
    13. Andrew Caplin & Mark Dean, 2015. "Revealed Preference, Rational Inattention, and Costly Information Acquisition," American Economic Review, American Economic Association, vol. 105(7), pages 2183-2203, July.
    14. Goecke, Henry & Luhan, Wolfgang J. & Roos, Michael W.M., 2013. "Rational inattentiveness in a forecasting experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 94(C), pages 80-89.
    15. Michael Woodford, 2014. "An Optimizing Neuroeconomic Model of Discrete Choice," NBER Working Papers 19897, National Bureau of Economic Research, Inc.
    16. Stefania Sitzia & Jiwei Zheng & Daniel John Zizzo, 2012. "Complexity and Smart Nudges with Inattentive Consumers," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2012-13, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    17. Martin, Daniel & Muñoz-Rodriguez, Edwin, 2022. "Cognitive costs and misperceived incentives: Evidence from the BDM mechanism," European Economic Review, Elsevier, vol. 148(C).

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    Risk management; Econometrics;

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