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

Steve Heinke

Economics Letters, 2024, vol. 237, issue C

Abstract: 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.

Keywords: Salience; Asset markets; Heterogeneity; Attention economics; Information acquisition; Rational inattention (search for similar items in EconPapers)
JEL-codes: C92 G02 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:237:y:2024:i:c:s0165176524001009

DOI: 10.1016/j.econlet.2024.111617

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