Working Paper: NBER ID: w19897
Authors: Michael Woodford
Abstract: A model is proposed in which stochastic choice results from noise in cognitive processing rather than random variation in preferences. The mental process used to make a choice is nonetheless optimal, subject to a constraint on available information-processing capacity that is partially motivated by neurophysiological evidence. The optimal information-constrained model is found to offer a better fit to experimental data on choice frequencies and reaction times than either a purely mechanical process model of choice (the drift-diffusion model) or an optimizing model with fewer constraints on feasible choice processes (the rational inattention model).
Keywords: neuroeconomics; stochastic choice; cognitive processing; information constraints
JEL Codes: C25; C91; D87
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Random cognitive processing errors (D80) | stochastic choice behavior (D01) |
| cognitive processing errors (D91) | stochastic choice behavior (D01) |
| cognitive processing errors (D91) | randomness in choices (D87) |
| optimal decision-making under information-processing capacity constraints (D87) | stochastic choice behavior (D01) |
| fit of the model to experimental data (C52) | cognitive processing errors (D91) |