Working Paper: NBER ID: w26415
Authors: Benjamin M. Hbert; Michael Woodford
Abstract: Decisions take time, and the time taken to reach a decision is likely to be informative about the cost of more precise judgments. We formalize this insight in the context of a dynamic model of optimal evidence accumulation. We provide conditions under which the resulting belief dynamics resemble either diffusion processes or processes with large jumps. We then demonstrate that the state-contingent choice probabilities predicted by our model are identical to those predicted by a static rational inattention model, providing a micro-foundation for such models. In the diffusion case, our model provides a normative foundation for a variant of the drift-diffusion model from mathematical psychology.
Keywords: No keywords provided
JEL Codes: D8; D83
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decision times (D79) | costs of information acquisition (D83) |
| costs of information acquisition (D83) | decision times (D79) |
| decision times (D79) | choice probabilities (C25) |
| costs of information processing (L86) | decision times (D79) |
| opportunity costs of time (J22) | stochastic choice patterns (D87) |