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Switching cost models as hypothesis tests

Author

Listed:
  • Cohen, Samuel N.
  • Henckel, Timo
  • Menzies, Gordon D.
  • Muhle-Karbe, Johannes
  • Zizzo, Daniel J.
Abstract
We relate models based on costs of switching beliefs (e.g., due to inattention) to hypothesis tests. Specifically, for an inference problem with a penalty for mistakes and for switching the inferred value, a band of inaction is optimal. We show this band is equivalent to a confidence interval, and therefore to a two-sided hypothesis test.

Suggested Citation

  • Cohen, Samuel N. & Henckel, Timo & Menzies, Gordon D. & Muhle-Karbe, Johannes & Zizzo, Daniel J., 2019. "Switching cost models as hypothesis tests," Economics Letters, Elsevier, vol. 175(C), pages 32-35.
    • Handle: RePEc:eee:ecolet:v:175:y:2019:i:c:p:32-35
    DOI: 10.1016/j.econlet.2018.11.014
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    Cited by:

    1. Timo Henckel & Gordon D. Menzies & Peter Moffat & Daniel J. Zizzo, 2019. "Three Dimensions of Central Bank Credibility and Inferential Expectations: The Euro Zone," Working Paper Series 56, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
    2. Timo Henckel & Gordon D. Menzies & Peter G. Moffatt & Daniel J. Zizzo, 2022. "Belief adjustment: a double hurdle model and experimental evidence," Experimental Economics, Springer;Economic Science Association, vol. 25(1), pages 26-67, February.
    3. Hidekazu Yoshioka & Yuta Yaegashi & Motoh Tsujimura & Yumi Yoshioka, 2021. "Cost‐efficient monitoring of continuous‐time stochastic processes based on discrete observations," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 37(1), pages 113-138, January.
    4. Henckel, Timo & Menzies, Gordon D. & Moffatt, Peter & Zizzo, Daniel J., 2019. "Three dimensions of central bank credibility and inferential expectations: The Euro zone," Journal of Macroeconomics, Elsevier, vol. 60(C), pages 294-308.
    5. Samuel N. Cohen & Derek Snow & Lukasz Szpruch, 2021. "Black-box model risk in finance," Papers 2102.04757, arXiv.org.

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    More about this item

    Keywords

    Inference; Switching cost; Inferential expectations; Hypothesis test;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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