Job Market Paper
- Estimating Information Cost Functions in Models of Rational Inattention (with Nathaniel Neligh)
In models of rational inattention, information costs are usually modeled using mutual information, which measures the expected reduction in entropy between prior and posterior beliefs, or ad hoc functional forms, but little is known about what form these costs take in reality. We show that under mild assumptions on information cost functions, including continuity and convexity, gross payoffs to decision makers are non-decreasing and continuous in potential rewards. We conduct laboratory experiments consisting of simple perceptual tasks with fine-grained variation in the level of potential rewards that allow us to test several hypotheses about rational inattention and compare various models of information costs via information criteria. We find that most subjects exhibit monotonicity in performance with respect to potential rewards, and there is mixed evidence on continuity and convexity of costs. Moreover, a significant portion of subjects are likelier to make small mistakes than large ones, contrary to the predictions of mutual information. This suggests that while people are generally rationally inattentive, their cost functions may display non-convexities or discontinuities, or they may incorporate some notion of perceptual distance. The characteristics of a decision-maker’s information cost function have implications for various economic applications, including investment. Close
Research in Progress
- Promises and Pronouncements (with Charles Maurin)
- Irrational Attention? A Neuroeconomic Approach to Confidence and Information Acquisition (with Pablo Egaña del Sol)
Ambuj Dewan
Ph.D. Candidate
Department of Economics
1022 International Affairs Building
420 West 118th Street
New York City, NY 10027
Phone: (646) 842-0292
ambuj.dewan@columbia.edu