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Experimental evidence on rational inattention

Anton Cheremukhin, Anna Popova and Antonella Tutino ()

No 1112, Working Papers from Federal Reserve Bank of Dallas

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.

Keywords: Risk management; Econometrics (search for similar items in EconPapers)
Pages: 33 pages
Date: 2011
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-upt
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DOI: 10.24149/wp1112

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Handle: RePEc:fip:feddwp:1112