Rational Inattention Research Articles

Firm Inattention and the Efficacy of Monetary Policy: A Text-Based Approach

Abstract This paper provides empirical evidence of the importance of firm attention to macroeconomic dynamics.We construct a text-based measure of attention to macroeconomic news and document that attention is polarized across firms and countercyclical. Differences in attention lead to asymmetric responses to monetary policy: expansionary monetary shocks raise market values of attentive firms more than those of inattentive firms, and contractionary shocks lower values of attentive firms by less. Attention also mitigates the effects of macroeconomic uncertainty on firm performance. In a quantitative rational inattention model that is calibrated with this new text-based measure, inattention drives monetary non-neutrality. As average attention varies over the business cycle, so does the efficacy of monetary policy.

Timescales of Rational Inattention.

Timescales of Rational Inattention.

Individual and contextual effects of attention in risky choice

AbstractWe investigate the role of visual attention in risky choice in a rich experimental dataset that includes eye-tracking data. We first show that attention is not reducible to individual and contextual variables, which explain only 20% of attentional variation. We then decompose attentional variation into individual average attention and trial-wise deviations of attention to capture different cognitive processes. Individual average attention varies by individual, and can proxy for individual preferences or goals (as in models of “rational inattention” or goal-directed attention). Trial-wise deviations of attention vary within subjects and depend on contextual factors (as in models of “salience” or stimulus-driven attention). We find that both types of attention predict behavior: average individual attention patterns are correlated with individual levels of loss aversion and capture part of this individual heterogeneity. Adding trial-wise deviations of attention further improves model fit. Our results show that a decomposition of attention into individual average attention and trial-wise deviations of attention can capture separable cognitive components of decision making and provides a useful tool for economists and researchers from related fields interested in decision-making and attention.

Pricing model of ride-hailing platform considering rationally inattentive passengers

ABSTRACT The ride-hailing services are booming in our daily lives, but it is unclear that how the platforms should set prices to maximize their profits when facing one kind of rationally inattentive passengers in a two-sided market. To fill this gap, we establish a profit maximization model for the ride-hailing platform based on queuing theory and rational inattention theory and analyze the properties of the model. Numerical examples are presented to demonstrate the impacts of perceived high and low service levels, information cost and prior belief on the optimal price and commission rate of the ride-hailing platform. The results show that (1) for different cities, there is always an optimal pricing strategy to maximize the profit of the platform. (2) To ensure maximum profit, the platform should disclose the service information of ride-hailing as much as possible, but also maintain the unknownness of ride-hailing services appropriately.

Rational inattention in neural coding for economic choice.

Mental operations like computing the value of an option are computationally expensive. Even before we evaluate options, we must decide how much attentional effort to invest in the evaluation process. More precise evaluation will improve choice accuracy, and thus reward yield, but the gain may not justify the cost. Rational Inattention theories provide an accounting of the internal economics of attentionally effortful economic decisions. To understand this process, we examined choices and neural activity in several brain regions in six macaques making risky choices. We extended the rational inattention framework to incorporate the foraging theoretic understanding of local environmental richness or reward rate, which we predict will promote attentional effort. Consistent with this idea, we found local reward rate positively predicted choice accuracy. Supporting the hypothesis that this effect reflects variations in attentional effort, richer contexts were associated with increased baseline and evoked pupil size. Neural populations likewise showed systematic baseline coding of reward rate context. During increased reward rate contexts, ventral striatum and orbitofrontal cortex showed both an increase in value decodability and a rotation in the population geometries for value. This confluence of these results suggests a mechanism of attentional effort that operates by controlling gain through using partially distinct population codes for value. Additionally, increased reward rate accelerated value code dynamics, which have been linked to improved signal-to-noise. These results extend the theory of rational inattention to static and stationary contexts and align theories of rational inattention with specific costly, neural processes.

Rational inattention in games: experimental evidence

Rational inattention in games: experimental evidence

Resource-rational psychopathology.

Psychopathology is vast and diverse. Across distinct disease states, individuals exhibit symptoms that appear counter to the standard view of rationality (expected utility maximization). We argue that some aspects of psychopathology can be described as resource-rational, reflecting a rational trade-off between reward and cognitive resources. We review work on two theories of this kind: rational inattention, where a capacity limit applies to perceptual channels, and policy compression, where the capacity limit applies to action channels. We show how these theories can parsimoniously explain many forms of psychopathology, including affective, primary psychotic, and neurodevelopmental disorders, as well as many effects of psychoactive medications on these disorders. While there are important disorder-specific differences and the theories are by no means universal, we argue that resource rationality offers a useful new perspective on psychopathology. By emphasizing the role of cognitive resource constraints, this approach offers a more inclusive picture of rationality. Some aspects of psychopathology may reflect rational trade-offs rather than the breakdown of rationality. (PsycInfo Database Record (c) 2024 APA, all rights reserved).

Fusing Repeated Cross-Sectional Revealed Preference Datasets based on Rational Inattention Theory: Accounting for Changing Modal Preferences

To address the methodological limitation of cross-sectional studies and the data constraints of longitudinal/panel studies, this paper presents a model-based method to fuse repeated cross-sectional travel survey data based on the theory of rational inattention (RI) in discrete choice modeling. In the proposed framework, older cross-sectional data are used to model the prior probability of choice alternatives, and more recent cross-sectional data are used to capture conditional heterogeneous choices. The fusion method is theoretically more robust and computationally less burdensome than existing data pooling techniques. The method is empirically tested using data from two cycles of a large-sample post-secondary student travel survey in the Greater Toronto and Hamilton Area to investigate the commuting mode choices of post-secondary students. Parameter estimates of the RI-based multinomial logit (MNL) model indicate that the proposed method can generate behaviorally consistent results. Validation of the estimated model using a holdout sample indicates its improved forecasting performance compared with the classical random utility maximizing MNL model. The fusion method can be extended to more than two cycles of repeated cross-sectional data by updating the prior probabilities whenever new cross-sectional data become available. Thus, the study presents a continuous framework for fusing information from multiple time points using repeated cross-sectional datasets to capture preference evolution better and enhance the forecasting robustness of discrete choice models.

Effects of monetary policy on household expectations: The role of homeownership

We study the role of homeownership in the effectiveness of monetary policy on households’ expectations based on individual-level microdata in the U.S. We find that homeowners lower their near-term inflation expectations and optimism about the labor market outlook in response to a rise in mortgage rates, while renters are less likely to do so. We further show that forward guidance shocks lead to similar differences between homeowners and renters. Our results suggest that homeowners pay attention to news on interest rates and adjust their expectations accordingly in a manner consistent with the intended effect of monetary policy. We characterize this empirical finding with a rational inattention model where mortgage payments create an incentive for homeowners to acquire information on monetary policy, unlike renters. This housing-driven endogenous attentiveness is the key mechanism behind the compelling empirical link among homeownership, attention, and the transmission of monetary policy.

Rational inattention: A new theory of neurodivergent information seeking.

This paper presents rational inattention as a new, transdiagnostic theory of information seeking in neurodevelopmental conditions that have uneven cognitive and socio-emotional profiles, including developmental language disorder (DLD), dyslexia, dyscalculia and autism. Rational inattention holds that the optimal solution to minimizing epistemic uncertainty is to avoid imprecise information sources. The key theoretical contribution of this report is to endogenize imprecision, making it a function of the primary neurocognitive difficulties that have been invoked to explain neurodivergent phenotypes, including deficits in auditory perception, working memory, procedural learning and the social brain network. We argue that disengagement with information sources with low endogenous precision (e.g. speech in DLD, orthography-phonology mappings in dyslexia, numeric stimuli in dyscalculia and social signals in autism) constitutes resource-rational behaviour. We demonstrate the strength of this account in a series of computational simulations. In experiment 1, we simulate information seeking in artificial agents mimicking an array of neurodivergent phenotypes, which optimally explore a complex learning environment containing speech, text, numeric stimuli and social cues. In experiment 2, we simulate optimal information seeking in a cross-modal dual-task paradigm and qualitatively replicate empirical data from children with and without DLD. Across experiments, simulated agents' only aim was to maximally reduce epistemic uncertainty, with no difference in reward across information sources. We show that rational inattention emerges naturally in specific neurodivergent phenotypes as a function of low endogenous precision. For instance, an agent mimicking the DLD phenotype disengages with speech (and preferentially engages with alternative precise information sources) because endogenous imprecision renders speech not conducive to information gain. Because engagement is necessary for learning, simulation demonstrates how optimal information seeking may paradoxically contribute negatively to an already delayed learning trajectory in neurodivergent children. RESEARCH HIGHLIGHTS: We present the first comprehensive theory of information seeking in neurodivergent children to date, centred on the notion of rational inattention. We demonstrate the strength of this account in a series of computational simulations involving artificial agents mimicking specific neurodivergent phenotypes that optimally explore a complex learning environment containing speech, text, numeric stimuli, and social cues. We show how optimal information seeking may, paradoxically, contribute negatively to an already delayed learning trajectory in neurodivergent children. This report advances our understanding of the factors shaping short-term decision making and long-term learning in neurodivergent children.

Imperfect information and tourist's response to natural disasters

AbstractThis study investigates the international behaviour of individuals with imperfect information. We used both local and international tourist data pertaining to Hakone in Japan to focus on two natural disasters: the Great East Japan Earthquake (GEJE) and volcanic activity on Mount Hakone. Hotel guests' responses to these shocks were estimated using smooth local projections. The responses of less‐informed foreign guests differed from those of well‐informed domestic guests. Because of imperfect information, such as sticky information, rational inattention and selected information through news media, the GEJE and its aftermath decreased the number of foreign guests at a rate greater and more persistent than that of domestic guests. Conversely, changes in volcanic alert levels slightly affect foreign guests because of the absence of information (or rational inattention); however, they have negative and persistent effects on domestic guests.

Top–down and bottom–up information acquisition: Application to financial markets

Recent studies confirm the main prediction of the rational inattention framework that the perceived value of information (top–down) as a key driver of attention. However, these investigations also report stimulus-driven salience effects (bottom–up) that counteract the framework’s predictions. In this manuscript, I propose an extension to the standard rational inattention model by incorporating bottom–up attention processes such as salience-effects through varying information processing costs. Applied to asset pricing with a representative agent a higher information salience generally reduces the cost of information processing (attention) needed for the same level of uncertainty reduction. Due to a substitution effect in the attention allocation across information, an attention-maximizing salience emerges. In general, a higher information salience consistently enhances asset price informativeness.

Erratum to “Consumer Choice Under Limited Attention When Alternatives Have Different Information Costs”

There is an error in one of the results of our paper [Huettner F, Boyacı T, Akçay Y (2019) Consumer choice under limited attention when alternatives have different information costs. Oper. Res. 67(3):671–699]. In this erratum, we point out the error and provide a correction based on Walker-Jones [(2023) Rational inattention with multiple attributes. J. Econom. Theory 212:105688]. Our key characterizations, insights, and numerical examples do not depend on this error and, hence, remain valid. The main implication is on the stopping condition used in the algorithm. We propose a fix based on the new sufficient condition and, if needed, standard convex optimization techniques.

What can analyst forecasts tell us about imperfect information?

We used two imperfect information models, taking analyst as representatives of informed investors, quantifying the potential information constraints of the financial market and different companies, and found that China's financial market has more serious information friction than the United States, which means that people update the information set every seven to eight months on average or people's weight on new information is only 0.37. At the same time, we also found evidence consistent with cognitive constraints or rational inattention theory, that the more volatile a company's and industry performance, the slower analysts are to respond to that company's information.

Complexity and Sophistication.

Many financial situations present individuals with simple alternatives to solving complex problems. The value of these alternatives depends on whether individuals are sophisticated and know when they are better off opting out of complexity. We tested complexity's effects and evaluated sophistication in a large and diverse sample. We randomly assigned both complexity to portfolio problems and the offer of a simple alternative to portfolio choice. The less-skilled earn lower returns under complexity because they often opt out when the simple alternative is dominated. To interpret the findings, we develop a novel method for estimating the structural parameters of a rational inattention model. The structural estimates are consistent with substantial sophistication. Large fractions of the money that the low-skilled lose by opting out can be justified by their higher costs of attention.

Informational separability and entropy

Informational separability occurs when information decreases as the result of suppressing information that differentiates a subset of states in experiments. With multiple states, informational separability leads to entropy measures. Its implications in multiple different contexts are discussed, including segregation measurement, inference with partial information, and rational inattention.

Competing to Commit: Markets with Rational Inattention

Two homogeneous-good firms compete for a consumer’s unitary demand. The consumer is rationally inattentive and pays entropy costs to process information about firms’ offers. Compared to a collusion benchmark, competition produces two effects. As in standard models, competition puts downward pressure on prices. But, additionally, an attention effect arises: the consumer engages in trade more often. This alleviates the commitment problem that firms have when facing inattentive consumers and increases trade efficiency. For high enough attention costs, the attention effect dominates the effect on prices: firms’ profits are higher under competition than under collusion. (JEL D11, D21, D43, D83, L12)

Geometric methods for finite rational inattention

We present a geometric approach to the finite Rational Inattention (RI) model, recasting it as a convex optimization problem with reduced dimensionality that is well suited to numerical methods. We provide an algorithm that outperforms existing RI computation techniques in terms of both speed and accuracy in both static and dynamic RI problems. We further introduce methods to quantify the impact of numerical inaccuracy on the model's outcomes and to produce robust predictions regarding the most frequently implemented actions.

Endogenous Information and Simplifying Insurance Choice

In markets with complicated products, individuals may choose how much time and effort to spend understanding and comparing alternatives. Focusing on insurance choice, we find evidence consistent with individuals acquiring more information when there are larger consequences from making an uninformed choice. Building on the rational inattention literature, we develop and estimate a parsimonious demand model in which individuals choose how much to research difficult‐to‐observe characteristics. We use our estimates to evaluate policies that simplify choice. Reducing the number of plans can raise welfare through improved choice as well as savings in information costs. Capping out‐of‐pocket costs generates larger welfare gains than standard models. The empirical model can be applied to other settings to examine the regulation of complex products.

Bringing Rational Inattention to the Market for Lemons

Bringing Rational Inattention to the Market for Lemons