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Rational Inattention when Decisions Take Time

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  • Benjamin M. Hébert
  • 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.

Suggested Citation

  • Benjamin M. Hébert & Michael Woodford, 2019. "Rational Inattention when Decisions Take Time," NBER Working Papers 26415, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:26415
    Note: ME
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    References listed on IDEAS

    as
    1. Drew Fudenberg & Philipp Strack & Tomasz Strzalecki, 2018. "Speed, Accuracy, and the Optimal Timing of Choices," American Economic Review, American Economic Association, vol. 108(12), pages 3651-3684, December.
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    3. Filip Matêjka & Alisdair McKay, 2015. "Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model," American Economic Review, American Economic Association, vol. 105(1), pages 272-298, January.
    4. Jakub Steiner & Colin Stewart & Filip Matějka, 2017. "Rational Inattention Dynamics: Inertia and Delay in Decision‐Making," Econometrica, Econometric Society, vol. 85, pages 521-553, March.
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    14. Benjamin Hébert & Michael Woodford, 2021. "Neighborhood-Based Information Costs," American Economic Review, American Economic Association, vol. 111(10), pages 3225-3255, October.
    15. Michael Woodford, 2014. "Stochastic Choice: An Optimizing Neuroeconomic Model," American Economic Review, American Economic Association, vol. 104(5), pages 495-500, May.
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    Citations

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    Cited by:

    1. Bartosz Maćkowiak & Filip Matějka & Mirko Wiederholt, 2023. "Rational Inattention: A Review," Journal of Economic Literature, American Economic Association, vol. 61(1), pages 226-273, March.
    2. Pavel Ilinov & Andrei Matveenko & Maxim Senkov & Egor Starkov, 2022. "Optimally Biased Expertise," CERGE-EI Working Papers wp736, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    3. Frederick Callaway & Antonio Rangel & Thomas L Griffiths, 2021. "Fixation patterns in simple choice reflect optimal information sampling," PLOS Computational Biology, Public Library of Science, vol. 17(3), pages 1-29, March.
    4. Benjamin Hébert & Michael Woodford, 2021. "Neighborhood-Based Information Costs," American Economic Review, American Economic Association, vol. 111(10), pages 3225-3255, October.
    5. Matysková, Ludmila & Montes, Alfonso, 2023. "Bayesian persuasion with costly information acquisition," Journal of Economic Theory, Elsevier, vol. 211(C).
    6. Roc Armenter & Michèle Müller-Itten & Zachary Stangebye, 2020. "Rational Inattention via Ignorance Equivalence," Working Papers 20-24, Federal Reserve Bank of Philadelphia.
    7. Spyros Galanis & Sergei Mikhalishchev, 2024. "Information Aggregation with Costly Information Acquisition," Papers 2406.07186, arXiv.org, revised Nov 2024.
    8. Hébert, Benjamin & Woodford, Michael, 2023. "Rational inattention when decisions take time," Journal of Economic Theory, Elsevier, vol. 208(C).
    9. Jonathan Schaffner & Sherry Dongqi Bao & Philippe N. Tobler & Todd A. Hare & Rafael Polania, 2023. "Sensory perception relies on fitness-maximizing codes," Nature Human Behaviour, Nature, vol. 7(7), pages 1135-1151, July.
    10. Shaofei Jiang, 2024. "Costly Persuasion by a Partially Informed Sender," Papers 2401.14087, arXiv.org, revised Nov 2024.
    11. Jetlir Duraj & Yi-Hsuan Lin, 2022. "Costly information and random choice," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 74(1), pages 135-159, July.
    12. Benjamin Davies, 2024. "Learning about a changing state," Papers 2401.03607, arXiv.org.

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    More about this item

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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