Working Paper: CEPR ID: DP15408
Authors: Bartosz Adam Mackowiak; Filip Matejka; Mirko Wiederholt
Abstract: We review the recent literature on rational inattention, identify the main theoretical mechanisms, and explain how it helps us understand a variety of phenomena across fields of economics. The theory of rational inattention assumes that agents cannot process all available information, but they can choose which exact pieces of information to attend to. Several important results in economics have been built around imperfect information. Nowadays, many more forms of information than ever before are available due to new technologies, and yet we are able to digest little of it. Which form of imperfect information we possess and act upon is thus largely determined by which information we choose to pay attention to. These choices are driven by current economic conditions and imply behavior that features numerous empirically supported departures from standard models. Combining these insights about human limitations with the optimizing approach of neoclassical economics yields a new, generally applicable model.
Keywords: rational inattention; information choice
JEL Codes: D8
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rational inattention (D80) | slow adjustment of expectations and actions (D84) |
| rational inattention (D80) | price dynamics (E30) |
| rational inattention (D80) | portfolio allocations (G11) |
| rational inattention (D80) | discrimination in labor markets (J70) |
| cognitive limitations (D91) | different responses based on the economic environment (F61) |
| cognitive cost of processing information (D91) | biased investment decisions (G41) |
| cognitive limitations (D91) | statistical and taste-based discrimination (J79) |
| cognitive limitations (D91) | influence on hiring practices (M51) |